How to trade WTI crude oil amid US recession, Iran-Israel war concerns?

Oil trading strategy, August 6, 2024: Oil prices are expected to remain subdued in short to medium term as demand has deteriorated sharply from Asia and, with the US on the verge of recession

Crude oil recovers from seven-month low amid geopolitical risks

The global economic rout triggered a sell-off in industrial commodities, with crude oil falling to fresh seven-month lows on Monday. Brent futures settled above $76 a barrel, the lowest level since January and WTI made fresh lows of $71.67, before settling at $72.94. 

Oil notched four-weeks of declines, losing 8 per cent of its value since mid-June amid signals of faltering demand in the US and China, with the Asian nation rolling out plans to spur domestic consumption over the weekend.

Geopolitical risks remain high

Oil advanced from a seven-month low as output at Sharara in southern Libya has now stopped completely. The oil field has a production capacity of 300k b/d; although, before the disruption, it was producing around 270k b/d. In addition, markets are still waiting to see how Iran responds to Israel after it vowed retaliation for the assassination of Hamas' political leader on Iranian soil.  Geopolitical conflicts and supply chain limitations continue to be major factors in trade war between the US and China.

 

Global Economic slowdown

The global manufacturing PMI, sponsored by JPMorgan and compiled by S&P Global Market Intelligence, came at 49.7, down from 50.8 in June. This signalled a deterioration of business conditions for the first time in seven months in July. The PMI survey's sub-index of production signalled a near-stalling of production in July. 

Output fell in 16 of the 31 economies for which manufacturing data is available, which is the highest proportion for six months. Fresh data from factories indicates a decline in China's industrial landscape, showing a decline in manufacturing activity and a resulting decrease in demand for oil. This slowdown partly results from China's economy moving away from heavy industries and toward a more service-oriented model.

Opec+ meeting

The Opec+ Joint Ministerial Monitoring Committee (JMMC) meeting played out as widely expected yesterday. The committee recommended no changes to output policy for the wider group. In the statement from Opec, the JMMC reiterated that the gradual phase-out of supply cuts from October 2024 could be paused or reversed depending on market conditions. 

A plunge in crude oil held worldwide on tankers is bullish for prices. Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least seven days fell by -31% w/w to 56.66 million bbl in the week ended August 2, the lowest in more than four years.

Managed money turning side

Hedge funds and other money managers sold the equivalent of 117 million barrels in the six most important futures and options contracts over the seven days ending on July 30. Fund managers had sold petroleum in each of the most recent four weeks, cutting their net position by a total of 262 million barrels since the start of July, which has resulted. The US economy is clearly indicating that it is on the verge of recession with unemployment rate ticking to 4.3%, while the rate hike by Bank of Japan by 15 basis points (bp) to around 0.25 per cent last week. That apart, the Japanese central bank plans to cut the amount of its monthly JGB purchases going forward by about Y400 billion each calendar quarter from Y5.7 trillion in July to about Y3 trillion in January – March 2026. The US Fed would remain in intense pressure on the rate cut front and market has already priced in 50 bps cuts in September FOMC and anticipate a 100 bps cuts for 2024.

Outlook

We expect prices to remain subdued in short to medium term as demand has deteriorated sharply from Asia and, with the US on the verge of recession, we see bleak chances of revival of oil demand. WTI prices could fall back to $68 level, the immediate support remains around $70 and short-term trading range would likely to be $72-$78.

WTI Crude Oil Sep: Support: $71, Resistance: $76

MCX Crude Aug: Support: 5950, Resistance: 6450.

============================
Disclaimer: Mohammed Imran is research analyst at Sharekhan by BNP Paribas. Views expressed are personal.