Crude Oil prices down 9% in 5 weeks on growth worries; outlook stays tepid

The overall sentiment in oil remains bearish and we expect prices to see further sell towards the support of $70 and $68 per barrel, says Mohammed Imran of Sharekhan by BNP Paribas.

Crude oil prices to moderate further amid economic slowdown

Crude oil prices rose Wednesday on concern that an expected retaliatory attack by Iran against Israel could spark an escalation of Middle Eastern hostilities. WTI settled with gains of 2.3 per cent at $75.23/b for the day, but is down 3.5 per cent in August, while it has lost 4.5 per cent of value in July.

In last 5-week oil prices have declined 8 per cent on concerns of economic slowdown. As of now through the week Crude prices added to their gains Wednesday after weekly EIA crude inventories fell more than expected to a 6-month low.  Dollar strength on Wednesday limited gains in energy prices.

 

Iran has threatened to retaliate against Israel for last week's assassination of a Hamas leader in Tehran.  Israel's military continues to conduct operations in Gaza, and there is the risk that the war might spread to Hezbollah in Lebanon or even to a direct conflict with Iran.

Global macro stays subdued

Global economic news Wednesday was weaker than expected and bearish for energy demand and crude prices.   China's July exports rose +7.0 per cent y/y, weaker than expectations of +9.5 per cent y/y and a bearish factor for global growth.  Also, German June exports fell - 3.4 per cent m/m, weaker than expectations of -1.5 per cent m/m and the biggest decline in 6 months.

The latest trade data from China was relatively bearish. Chinese crude oil imports in July averaged 10.01m b/d, down 3.1 per cent YoY and 11.8 per cent lower MoM. This leaves cumulative imports over the first seven months of the year down 2.4 per cent YoY. Weaker Chinese oil demand was a key driver behind the weakness in oil prices over much of July.

Bullish EIA report

EIA report was mixed for crude and products.  On the bullish side, EIA crude inventories fell -3.73 million bbl to a 6-month low, a larger draw than expectations of a decline of -1.8 million bbl. The gasoline demand has once again fallen back under $9 mbpd in US which is somewhat bearish signal.

The global crude oil market had remined in deficit of 0.4 mbpd, in H1-2024, while it expects the market to see deficit of 0.8mbpd in H2-2024 and whole year will see short fall of 0.58 mbpd. EIA has global oil demand at 103.35mbpd, global oil supply at 102.85mbpd in June 2024 and estimate a total of around 2.81mbpd of supplies were offline in July versus 2.61mbpd in June

EIA forecasts that global production of petroleum and other liquid fuels will increase by 570,000 b/d in 2024, the net result of a 1.3 million-b/d decline from OPEC+ countries and a more than 1.8 million b/d-increase from countries outside of OPEC+, led by growth in the US, Canada, Guyana, and Brazil. Global production of liquid fuels will increase by 2.1 million b/d in 2025, as the OPEC+ voluntary production cuts unwind throughout the year. OPEC+ production increases by 700,000 b/d, combined with 1.4 million b/d of production growth from countries outside of OPEC+.

On the demand side, EIA projects that global liquid fuel consumption will grow by 1.1 million b/d in 2024 and 1.6 million b/d in 2025, lower than the previous forecast of 1.8 million b/d. The primary reason for this reduction is attributed to China, where EIA expect slowing economic growth will continue to reduce diesel consumption.

Outlook

The economic slowdown is clearly visible on the crude oil recent performance as it dragged over 9 per cent in 5 weeks, while the geo-political concerns have kept it bouncing back but overall sentiment in oil remain bearish and we expect prices to see further sell towards the support of $70 and $68.

WTI Crude oil Sep :Support: $72, Resistance : $77

MCX Crude Aug:  Support : Rs 6,100 ; Resistance : Rs 6,550.

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