Crude Oil outlook: Global conflicts, rate cut optimism up bullish bets

The geo-political risk and expectation of three rate cuts from US fed has triggered rally in oil prices, says Mohammed Imran.

Renewed geo-political risk and rate cut optimism drive crude oil higher

Crude oil prices experienced their most significant one-day increase in over nine months Wednesday due to escalating geopolitical tensions in the Middle East that could lead to a disruption of the region's crude supplies after Israel launched an airstrike in Iran that killed a Hamas leader and an airstrike in Beirut that killed a Hezbollah leader.

WTI crude futures rose 4.26 per cent to $77.91 due to Middle East conflict fears but fell 4.5 per cent on the monthly basis in July due to production uncertainties and weak Chinese demand. Brent crude gained 2.66 per cent, closing at $80.72.

 

EIA weekly data

The EIA's weekly inventory report showed that US commercial crude oil inventories fell by 3.44m barrels over the last week despite refiners cutting run rates by 1.5 percent. This was driven by the Midwest with an outage at the Joliet refinery. Stronger crude oil exports would have contributed to the draw, growing 733k b/d WoW. 

Gasoline inventories declined by 3.67m barrels, which took stocks to their lowest level since December. Lower refinery runs also offset a WoW decline in implied gasoline demand. However, implied demand continues to trend above seasonal levels. For distillates, stocks increased by 1.53m barrels over the week. US gasoline demand ticked lower to 9.25 mbpd from 9.4 mbpd but still showing a healthier trend for the summer.

The OPEC+ Joint Ministerial Monitoring Committee will meet today. While this committee cannot change output policy, it can recommend changes it feels necessary. However, expectations going into the meeting are that they will recommend no change.

Economic slowdown

Despite of all the efforts by Beijing in reviving the economy through real estate reforms, lowering interest rates, the domestic consumption has not shown any sign of picking up. China's retail sales of consumer goods in the first six months were up 3.7 per cent, China's 2Q24 GDP growth fell to 4.7 per cent YoY, coming in noticeably softer than forecasts for 5.1 per cent YoY. Property investment slumped -10.1 per cent YoY through 1H24.

The PMIs for July suggest that China's economy weakened further this month, with official mfg. PMI index at 49.4 and Caixin mfg. PMI index falling into contraction after 9 months of expansion. China is second largest consumer of crude oil and its imports have fallen 2.9 per cent year on year to 11.1 million b/d (275.48 million mt) in the first half of 2024, the decline was due to the 10.8 per cent year-on-year reduction seen in June this year, the sharpest fall since June 2022.

Renewed Geo-political risk

Iran's supreme leader Ayatollah Ali Khamenei has reportedly ordered retaliation against Israel following the death of Hamas leader Ismail Haniyeh in Tehran, heightening fears of potential escalation in the region and serious disruptions in the oil supply chain, while China firmly opposed and strongly condemned the assassination of Haniyeh in Tehran, as well as “a series of recent irresponsible actions, including Israel’s attack on southern Beirut. This raises a direct conflict between Israel and Iran getting face to face, which remain supportive for oil prices.

FOMC 

The FOMC left rates unchanged at between 5.25-5.50 per cent, but it made tweaks to its statement that appear to leave the door open to a rate cut in September. The Fed did however reiterate that it does not expect that it will be appropriate to lower rates until it has gained greater confidence that inflation is moving sustainably towards target, suggesting that the Committee still wants to see favourable data before pivoting to rate cuts.

Overall, it was a dovish meeting, even though Chair Powell didn’t quite seal a September rate cut. Market continues to completely price in a rate cut in September.

Outlook

The geo-political risk and expectation of three rate cuts from US fed has triggered rally in oil prices but we still expect prices will subside in absence of real incremental demand from Asian nations. China’s economic slowdown will continue to weigh on prices hence we expect prices to once again fall back to support of $75. The likely short term trading is $74-$80.

WTI Crude oil Sep :Support: $74, Resistance : $80

MCX Crude Aug:  Support: Rs 6,400 , Resistance: Rs 6,700

Disclaimer: Mohammed Imran - Research Analyst, Sharekhan by BNP Paribas, views expressed are personal.