Market expects crude oil prices to recover; adopt buy-on-dip strategy

Crude oil prices observed steepest weekly decline in two months with both benchmarks settling below their 200-day moving average and wiping out 7 per cent of their values. WTI finished at $78 and Brent at $83 for the week ending 3 May amid easing of geo-political risk after Hamas and Israel set for another round of peace talks in Cairo, although chances of solution remain low as Hamas negotiators are pushing for an end to war in exchange of freeing the Israeli  hostages, but Israel seems to a have ruled it out, that once again will keep the risk premiums elevated.

EIA Weekly inventories

The commercial crude oil inventories recorded an inflow of 7.3 million barrels for the week ending April 26, to stand at 460.9 million barrels, its highest since June-2023, while refinery utilisation rate fell to 87.5 per cent, which is a big concern at this time of the year, when historically utilisation has remained on higher side due to the start US summer driving season from June. 

Gasoline stocks jumped by 300,000 barrels in the week to 227.1 million barrels, compared with forecasts for a 1.1-million-barrel draw. 

The total US demand for three main fuels (gasoline, distillate and Jet fuel) is on downside for past five weeks to reach to levels last seen in 2020 during covid related shutdowns, a visible case of demand erosion 

OPEC+

OPEC+ which includes Russia and other non-OPEC members will next meet on June 1 in Vienna to set output policy and we expect the cartel to extend their voluntary oil output cuts of 2.2 million barrels per day beyond June. 

The OPEC+ group is currently cutting output by 5.86 million bpd, equal to about 5.7 per cent of global demand. 

The cuts include 3.66 million bpd by OPEC+ members valid through to the end of 2024, and 2.2 million bpd of voluntary cuts by some members expiring at the end of June.

Weakening macros

The April’s employment report from the US underlined growing evidence that labour market rebalancing is already underway. 

April hiring stood at 175,000, while previous two months were downwardly revised by minus 22K, the unemployment rate ticked up to 3.9 per cent and hourly earnings dropped to 3.8 per cent for the first time since June 2021. 

The number of jobs opening revealed a bigger than expected drop in job openings to 8.5 million, the lowest level in more than three years. The ISM Manufacturing PMI for April fell back into contraction territory, followed by ISM Services which dipped below 50 for the first time in 16 months. 

However, China’s services PMI index at 52.5 for April, encourages the belief that China is on a path of economic recovery that augurs well for future demand outlook.

Outlook

OPEC is expected to keep the supply tight to maintain the price stability at a time when demand is seen weakening. Saudi Arabia has raised the June official selling price of its flagship Arab Light grade by 90 cents to $2.90 a barrel for above benchmark prices. 

On the other hand, some risk continued to prevail in the Middle East as Israel’s military has begun moving civilians out of Rafah with an evacuation order. 

The trading volumes could be lower due to light calendar week, but overall, we expect prices to see some recovery and dip should be bought, the expected trading range is $76-$82 through the week.

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Disclaimer: Mohammed Imran is a research analyst at Sharekhan by BNP Paribas. Views expressed are his own. Neither the analyst nor his immediate family members have any financial interest in the above mentioned commodity.