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The market did not like the OPEC plus policy decision of phasing out the voluntary cuts of 2.2 million barrels per day from October 2024 to September 2025, in sign that members want to export more. This triggered a selloff in crude oil prices on Monday, WTI crude fell 3.6 per cent while Brent Crude was down 3.39 falling to four months low level.
OPEC plus on Sunday brought forward another complex deal that tried to achieve two competing objectives. Firstly, OPEC plus continues to reassure markets that they will support oil prices by rolling deep production cuts into the quarter and year ahead (bullish for prices).
At the same time, they laid out a framework to gradually bring production online through 2025 (bearish for prices).
However, OPEC plus emphasised that the increase in production is subject to market conditions. The OPEC plus roughly holds production cuts of around 5.8 mbpd which is around 6 per cent of the global supplies.
The group's decision is incrementally bearish for oil prices in light of high interest rates and rising output from non-OPEC producers like the U.S.
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The early estimate for OPEC’s May production has started coming with a Bloomberg survey showing Iraq and UAE have missed on their compliance quota to have overproduced 458 kbpd, and Iraq is not showing any sign of compensating for the overproduction since the start of the year. While at the group level OPEC output averaged 26.96m b/d in May, up 60k b/d MoM.
The markets have discounted the incremental production from the non-OPEC nations, especially from the US, Canada, Brazil and Guyana, which may add around 1.4 mb/d in 2024 and 2025 and will keep a lid on prices in the coming months.
Moreover, crude and end products stockpiles have been witnessing an increase last month giving more relief to the market.
De-escalation of Risk premiums & weakening macros
The latest signs of de-escalation of risk premiums have seen a 12 per cent correction in oil prices in the last two months. The setback for crude oil correlated with weak emerging markets as the official Chinese PMI figure for the manufacturing sector suggested a contraction.
ISM manufacturing was in contraction for a second straight month, coming in at 48.7 in May from 49.2 previously and 49.5 expected. New Orders dropped to 45.4 from 49.1, while Eurozone manufacturing has also faltered in the last two months.
Outlook
Given the above-mentioned developments, we believe that the oil market is heading lower in the short to medium term due to softening of global economic conditions, while rising production from non-OPEC nations and lack of compliance by OPEC plus members have over supplied the crude oil market in the last two months.
In short term prices could test support of $70, while oil prices may see some recovery on strong US summer gasoline demand and higher than expected US Hurricane season could see disruption in oil production.
We see our outlook for WTI in the third quarter of 2024 to average 80 $/b, and the end of year price of 85 $/b following the expected recovery in economic activity later in the year..
WTI Crude oil Jul :Support: $72-$70, Resistance : $76-$78
MCX Crude June: Support : 5900, Resistance : 6500.
(Disclaimer: Mohammed Imran is a Research Analyst at Sharekhan by BNP Paribas. Views expressed are personal.)
