Crude oil to trade in narrow range ahead of Opec meeting; check key levels

Crude oil outlook: Crude oil prices are expected to trade in a fairly tight range ahead of the key OPEC+ meet on June 1

Oil market outlook remains weak

Oil prices started on a weaker note on Tuesday with WTI July falling 0.5 per cent at $78.86/b in Asian trade, following Monday's softness when the contract ended down 35 per cent at $79.80/ barrel,  despite a recent uptick in geopolitical tensions ahead of an OPEC+ meeting on supply.

Last week, crude oil held weekly gain of 2.3 per cent to settle above $80/b, while futures stayed in a narrow range, with the outlook for supply and inflation in focus. Over the weekend, Operations at a Russian refinery were suspended due to a Ukrainian drone strike, and a missile from Yemen's Houthi group struck a tanker route to China in the Red Sea, again renewing the geo-political risks.

OPEC+ remain in focus

Oil prices have been trading in a tight range of $5 in last three weeks as market is awaiting for OPEC+ scheduled meet on June 1. Although we do not see much possibilities that the cartel will suddenly decide to roll back its voluntary cuts, but friction among the intra-cartel remains high and Iraq, Kazakhstan, and Nigeria continue to breach their official quotas.

On the other hand, Saudi Arabia, the UAE, and Kuwait, accounting for roughly 80 per cent of the group's total cuts, are still dictating the cartel’'s production cut strategy. Saudi Arabia's crude oil exports rose for a second consecutive month in March, reaching their highest in nine months.

Russian crude oil output has declined 1.8 per cent since the start of this year from the same period a year ago, to 195.7m tons due to the voluntary production cuts as part of OPEC+ deal.

China’s economic recovery weighing on oil demand

China remained the biggest drag on underperformance of oil prices in last two months as it is the biggest energy importer and the second largest consumer of crude oil in the world after US. While Beijing's think tank have been trying all the measures to bring back the economy back on track, the biggest bloat on economic recovery remains the real estate market, which contributes to 25-30 per cent of the GDP.

The April's data showed that Property investment declined 9.8 per cent in the first four months of 2024, new property sales plunged 28.3 per cent in the January-to-April period, new home prices fell for a 10th consecutive month by 0.6 per cent month-on-month in April, the fastest decline since November 2014.

This slowdown is reflected on the oil imports, which plunged 8.8 per cent on M-o-M basis in April to 44.7 million tons. In its recent measures over the weekend China has decided lowering the mortgage rate floor, reducing down payment requirements, and creating a 300 billion yuan relending facility to help state-owned enterprises buy unsold homes and convert them into affordable rentals. On the positive side, China's industrial output grew 6.7 per cent year-on-year in April, vs 4.5 per cent in March.

EIA inventories and summer driving season

The gap between current US inventories and the 5-year average has narrowed due to weaker builds in last few weeks. WTI crude oil prices could well be placed to trade above $80 in upcoming months as the US summer driving season officially be staring from first week of June. We expect global gasoline demand to remain robust this summer despite recent signs of weakness in the market. The refinery utilisation rate is already into 90s and US Gasoline demand rose to 8.87mbpd last week, which is expected to climb higher as the summer approaches.

Outlook

We expect crude oil prices to trade in a fairly tight range ahead of the key OPEC+ meet on June 1. Overall, market balance remains in surplus and well supplied, while major upside and downside risks seems limited. Thus, any rally over $80 could be considered as shorting opportunity and we expect the short term trading range for WTI contract to be in between $76-$81/b.

WTI Crude oil Jul: Support: $76.50, Resistance: $80

MCX Crude June: Support: 6460, Resistance: 6650

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Disclaimer: Mohammed Imran is a Research Analyst at Sharekhan by BNP Paribas. Views expressed are personal.