How to trade Brent crude oil today; Mohammed Imran of Sharekhan decodes

Supply glut fear sends crude oil  prices into contango 

The renewed geo-political risks between Ukraine-Russia along with some output cuts due to maintenance and power outages saw crude oil prices making the biggest day gains in five weeks. Oil prices rallied on Monday with ICE Brent setting almost 3.2 per cent higher. 

 

A softening in the USD supported most of the commodity’s complex. The power outage in Norway resulted in a halt of production at the 755k b/d Johan Sverdrup field, Kazakhstan reported a 30 per cent drop in production from the Tengiz field due to ongoing maintenance.

 

White House with its NATO allies is progressing towards pushing Ukraine to allow geo-political risk to renew after a significant reversal of Washington's policy in the Ukraine-Russia conflict, President Joe Biden's administration has allowed Ukraine to use US-made weapons to strike deep into Russia, in response to North Korean troops entering the fray from the Russian side. 

 

 

As North Korea may deploy as many as 100,000 troops to aid Russia’s war on Ukraine, increasing the likelihood of North Korea becoming more directly involved in the conflict.

 

Crude oil faces supply glut

Crude oil prices briefly flipped into contango on Monday (a condition where spot trades at a premium to a future month, reflecting a bearish market structure) for the first time since February this year, signalling an overhang of supplies in the near future. Opec/EIA and IEA roughly expect a surplus production of 1-1.5 mbpd in 2025, driven by higher production from non-opec members led by the US, whose production has soared in 2024, and is expected to grow higher in 2025 as Trump supports US energy drillers to produce more for economic reasons and may push more sanctions on Iran and Venezuela. 

 

EIA also raised the global crude oil supply outlook for 2024 and 2025, as organisation sees global oil output for 2024 to 102.6 million bpd, from its prior forecast of 102.5 million bpd. 

 

For next year, it expects world output of 104.7 million bpd, up from 104.5 million bpd previously. EIA expects global liquid fuel consumption to rise by 1.0 million b/d in 2024 and 1.2 million b/d in 2025.  

 

US Inventories

Inventories at the delivery point for futures at Cushing, Oklahoma are largely in line with recent seasonal norms but US crude production has continued to surge to fresh records above 13 million barrels a day, 

 

US crude oil inventories as of November 8 were -4.4 per cent below the seasonal 5-year average, (gasoline inventories were -4.3 per cent below the seasonal 5-year average, and distillate inventories were -5.4 per cent below the 5-year seasonal average. 

 

China's economy offers green shoot

Chinese economy stabilised in October outside of the residential construction sector, with consumer spending surprising on the upside. Retail sales grew 4.8 per cent over the year to October, the strongest pace in eight months and above the 3.8 per cent yr expected by the market. 

 

Industrial production grew 5.3 per cent year in October, down from the 5.4 per cent yr recorded in September against the expectation of 5.6 per cent. Fixed asset investment grew 3.4 per cent over the year to October, However, housing investment declined by 10.3 per cent yr in October, also in line with the pace recorded over calendar 2024 further evidence the construction sector remains in a slump.  

 

Crude demand in China has weakened and is a bearish factor for oil prices, China's Oct apparent oil demand fell -5.4 per cent year-on-year (Y-o-Y) to 14.07 million bpd, and Jan-Oct apparent oil demand was down -4.03 per cent Y-o-Y to 14.00 million bpd.

 

Outlook

Crude prices continued to be weighed down by China demand concerns and ample global supply into 2025 after both opec and the IEA lowered their demand forecasts. 

 

Despite the strength in the flat price on Monday, the prompt WTI time spread flipped into contango, which points towards a market that looks better supplied. 

 

Globally, our balance shows that the market will be in surplus through 2025. However, the size of the surplus depends on what opec+ decides to do when it comes to output policy for next year. 

 

The group will likely decide on this at their next meeting on December 1.  We see oil prices heading south towards the support of $65-$62-$60  by Q12025.

 

WTI Crude oil Jan contract's support is at $65 and resistance is at $71

MCX Crude Dec contract's support is at Rs 5,600 and resistance is at Rs 6,050.  (This article is by Mohammed Imran, research analyst at Sharekhan by BNP Paribas. Views expressed are his own.)