How to trade oil futures amid weak demand, Hurricane Francine? Outlook here

Crude oil strategy, Sept 12: WTI crude oil rice may fall to $65 in medium-term

Hurricane disruption drives crude oil higher but demand remains tepid

Crude oil prices recovered strongly on Wednesday, supported by the fear that hurricane-led disruptions to may hit the US Gulf coastline which accounts for 25 per cent of the total US crude production from 60 per cent of the refineries. 

WTI crude rose by 2.37 per cent to $67.31, and Brent Crude increased by 2.05 per cent to $70.61. Prices have declined 8 per cent for the month and 6 per cent year-to-date. Hurricane Francine, which is expected to impact Louisiana, has caused some offshore oil platforms to shut down almost 675k b/d oil production shut in. That is equivalent to 39 per cent of the US Gulf of Mexico's output.

 

Opec revised down crude oil demand

Opec has revised down its demand outlook to matchup with the other sources like EIA and IEA, which had lowered their demand outlook for 2024-25 in their previous months.

Opec has cut its 2024 demand forecast by 80 kbpd to 2 million barrels per day (mbpd). Further, Opec has also cut its 2025 global demand growth estimate to 1.74 million bpd from 1.78 million bpd. Total global demand is projected to reach 104.2 million barrels per day in 2024 and 106 million barrels per day in 2025. China accounted for the bulk of the downgrade as Opec trimmed its forecast of Chinese growth to 650,000 bpd in 2024 from 700,000 bpd. 

Opec's report showed that actual production fell in August mainly due to unrest in Libya disrupting output. Opec+ pumped 40.66 million bpd in August, down 304,000 bpd from July, led by a decline in Libya. While groups total Opec-12 crude oil production averaged 26.59 mb/d in August 2024, 197kb/d lower, on monthly basis.

EIA weekly inventory trend bearish

As the US Summer season ended officially, we are seeing dip in gasoline demand, which now stands at 8.4mbpd, down by 9.3mbpd a fortnight ago. Inventories, meanwhile, have jumped across the product line last week. Commercial crude inventories rose +833,000 bbl, gasoline stockpiles rose +2.31 million bbl. and distillate inventories rose +2.31 million bbl, more than expectations of +275,000 bl.  

China remains hurdle in crude oil outlook

The world biggest energy imports have been the biggest cause of concern for crude oil recent abysmal performance. China recorded 4th straight month of decline in imports as its crude imports fell by 7 per cent in August compared to the same period last year. While its advances on monthly basis. August imports last month totalled 49.10 million metric tonne, this was up from 42.34 million tonne in July, which was the lowest level since Sept. 2022. Imports fell by 3.1 per cent over the past year to 367 million tonne. China accounted for the bulk of the latest downgrade as Opec trimmed its forecast of Chinese growth to 650,000 bpd in 2024 from 700,000 bpd. Oil use in the world's second largest economy was facing headwinds from economic challenges and moves to cleaner fuels.

Oil prices and Inflation expectation

The decline in crude oil prices has heightened fears that inflation may undershoot the Fed’s target. This drop in inflation expectations has led investors to move into Treasuries, pushing yields lower. Brent oil falling below $70 per barrel, its lowest level since December 2021, The market is currently under-pricing the risk of inflation returning. Several factors, including rising food prices and easier access to credit, could lead to a resurgence in inflation. Markets are currently pricing in an 85 per cent chance of a 25-basis-point US rate cut compared to 71 per cent before the data. Markets will now look towards the US producer price index reading and initial jobless claims due today.

Outlook

We expect prices to remain volatile in either direction in short-term as hurricane fear will see prices testing the resistance of $69, but sustaining at that level or higher would depend how sooner could US refiners resumes operations. The overall trend remains bearish for oil in the medium to long term. We expect prices to fall back to $65-$62 in the medium-term.

WTI Crude oil Oct: Support: $65, Resistance: $70

MCX Crude Sep: Support: 5400, Resistance: 5850.

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Disclaimer: Mohammed Imran is a research analyst at Sharekhan by BNP Paribas. Views expressed are his own.