 "Crude oil")
WTI crude oil prices are trading steadier in the range of $77-$80 for the past one week, eking out marginal weekly gains, ahead of the crucial monthly oil reports from OPEC, IEA and release of US CPI data and retails sales later this week.
Crude oil prices have corrected significantly after posting 16 per cent gains for Q1-2024. However, since April the oil prices have lost roughly 7 per cent of their value, amid the easing of tension in the Middle East, largely wiping out the embedded risk premiums. Still, prices remain higher year-to-date by 10 per cent as OPEC and its allies restrict flows, and the group is widely expected to extend the curbs into the second half.
Economic slowdown and weak demand
The macro numbers for April have been discouraging with manufacturing activities registering contraction from US to China, reflective in softening on oil demand. China’s credit growth saw sequential decline at $27.7 billion in aggregate financing, the first contraction since October 2005.
New loans through the first four months of the year saw negative growth at -19.3 per cent YoY and -15.3 per cent YoY respectively, indicating dampening of risk sentiment and stalling economic recovery.
China crude oil imports in April stood at 44.7 million tons down 8.8 per cent from March’s 49.1 million tons, and the factory inflation stood in contraction of 2.5 per cent in April.
On the other hand, US weekly jobless claims jumped to 2,31,000, its highest since August-2023, following a softer NFP report of April, reflecting a visible slowdown in the US labour market.
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Demand for gasoline and diesel in the United States has plunged to its lowest seasonally since the onset of the Covid pandemic sparking concern that economic activity is now becoming stagnant. In the US, 4-week average implied gasoline demand is still at its lowest level since 2014 for this stage of the year at 8.63m b/d. Tepid economic indicators in China, rising US production and stubborn pockets of inflation in key economies are weighing on the oil market
Opec+ facing a compliance challenge.
The Opec+ is facing a challenging time ahead of its scheduled meeting on June 1st as members are showing lack of willingness to adhere to the rollover of voluntary cuts of 2.2 mbpd. The early survey for April indicates that the group has overproduced 249,000 b/d above quota in April, a compliance rate of 96.97 per cent, versus 97.9 per cent in March.
The alliance also produced above target in January and February, with compliance rates of 96.5 per cent and 97.8 per cent, respectively. Iraq and Kazakhstan have on record found to be over producing above their limit in 2024 and the recent comment from Iraq’s oil minister have indicated their unwillingness to carry the cuts further.
April production data will be the most recent available to Opec+ ministers when they meet June 1 to set production levels and is widely expected to roll over its current voluntary output cuts.
Outlook
The short to medium term outlook for crude oil remains bearish. The fear of stagflation is gripping the US market with inflation expected to stick higher, which may keep the interest rates higher and could see slowdown in global expansion in coming quarters.
Today markets will remain focused on the Opec monthly report and US PPI data, the next key area of resistance is between $81, where the psychologically important level converges with the 200-day moving average, on the downside, the support is at $75.28. We advise shorting the rallies.
WTI Crude oil: Support: $76.90, Resistance: $81
MCX Crude June: Support : 6455, Resistance: 6700
(Disclaimer: Mohammed Imran is a Research Analyst at Sharekhan by BNP Paribas. Views expressed are personal.)
(Disclaimer: Mohammed Imran is a Research Analyst at Sharekhan by BNP Paribas. Views expressed are personal.)
