Sharekhan bearish on crude oil due to oversupply; expects prices to dip

China's pro-active policy measure to see some spark in crude prices

Crude prices moved higher Monday on the prospects for additional stimulus measures in China that could revive economic growth and energy demand. Crude oil benchmarks rebounded, with WTI and Brent increasing by 1.7 per cent and 1.4 per cent, respectively, closing at $68.4/bbl and $72.1/bbl. Geopolitical uncertainties in the Middle East exerted upward pressure on oil prices, following the swift collapse of the Syrian government over the weekend.  Oil prices have been trading in a broader range of $6 since mid-October and are down 4.5 per cent year-to-date (Y-T-D).

 

 

China’s shift in monetary policy stance

The Chinese central policymakers, led by President Xi Jinping, announced that it would embrace a "moderately loose" strategy for monetary policy next year and vowed to be "more proactive" on fiscal policy, a sign of further easing ahead the monetary policy stance will shift to being moderately loose, marking a significant departure from the prudent monetary policy regime in place since 2011. We anticipate the PBoC will lower the 1-year Loan Prime Rate (LPR) by 40 basis points (bps) in 2025 and reduce the reserve requirement ratio (RRR) by an additional 100bps, providing substantial liquidity support to the economy.  The government has pledged to significantly enhance consumption, reflecting an increased emphasis on demand-side measures to balance growth and address structural challenges in the economy. Global markets are looking for the two day China economic work conference starting  December 11, that could give more clarity on the economic path and guidance for 2025.

 

China’s economic data disappoints   

Despite the bazooka of stimulus released in later September and October the economic numbers have largely remained contained, if not grown and the pressure of Trump-2.0 is clearly visible in the lacklustre performance in November.  China's exports grew at a slower pace in November than the previous month, while imports shrank, China’s outbound shipments from China eased to 6.7 per cent year-n-year (Y-o-Y) from 12.5 per cent of October.  However, imports rose for the first time in seven months on a Y-o-Y basis to 48.52 mmt, up 14.3 per cent Y-o-Y. disinflation remains a concern in China as CPI slowed unexpectedly to 0.2 per cent Y-o-Y (against estimate of 0.4 per cent) in November, while decline of Producer Price Index (PPI) narrowed to -2.5 per cent Y-o-Y (against estimate of -2.8 per cent)

 

Opec+ extends production cuts

Crude found support last Thursday after Opec+ pushed back a planned hike of its crude production by more than 180,000 barrels per day from January to April and said it would unwind its crude output cuts at a slower pace than planned.  Also, the United Arab Emirates (UAE) said it will delay the planned 300,000 barrels per day increase in its crude production target from January to April.   Opec+ had previously agreed to restore 2.2 million bpd of output in monthly instalments between January and late 2025.  However, that is now pushed back until September 2026.  Opec November crude production rose more than 120,000 barrels per day to 27.02 million barrels per day.

 

EIA weekly data

US Gasoline supplied to the market amounted to 8.74 million barrels per day, or 231,000 barrels per day higher than the previous week, while refinery utilisation increased by 2.8  per cent versus last week’s numbers to reach 93.3 per cent.

 

Outlook

The recent geo-political development in middle east with fall of Syrian regime, could bring more uncertainty in the region, which could see some risk premiums being added to crude oil, while the change in Chinese monetary policy stance could bring structural changes to the economy, which is long term positive for crude oil demand.  However, markets would still be on sidelines until US president elect Donald Trump unveils his plan of actions on trade front once he resumes Whitehouse in January. The fresh stimulus hopes, and geopolitical risk could see oil prices testing resistance of $72 in short term but medium to long term outlook still remains bearish due to oversupply of oil. We expect WTI crude oil prices to dip trade under $65 and Brent under $69 in H1-2025.

 

WTI Crude oil Jan :Support: $66, Resistance: $72

MCX Crude Dec:  Support : 5,620,  Resistance: 6,050  (This article is by Mohammed Imran – research analyst at Mirae Asset Sharekhan. Views expressed are his own.)