Crude oil may fall to Rs 6500/bbl, recession, rate hike talks may weigh on oil prices; adopt sell on rise

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By Royce Vargheese Joseph

WTI Crude oil futures ended the previous week 2.34% lower and closed at $84.76 per bbl as demand concerns once again took center stage. A strong dollar also added downward pressure on energy prices as it makes commodities more expensive for buyers holding other currencies. Better than expected CPI data from the US improved the conviction of jumbo rate hikes from the Fed, inducing a demand-sapping recession. Comments regarding refilling US Strategic petroleum reserves added to the market volatility. Meanwhile, last week witnessed the most significant weekly SPR drawdown in US history, taking the emergency oil reserves to the lowest level since October 1984, as the government set a plan in March to release 1 million barrels per day over six months to tackle high fuel prices. 

Almost 8.4 million barrels of oil have been released from reserves, equivalent to 1.2 mbpd of release. Once again the momentum has picked up and this is the reason why we are seeing a rise in commercial crude inventories. On the supply side, the risk of disrupted rail shipments for crude and other products in the US amid the prospects of a labour dispute limited the downside.

Outlook: Oil might come under pressure ahead of the FOMC meeting

Crude oil has started the week on a positive note, amid reports that the Chinese city of Chengdu lifted a two-week lockdown, raising hopes of wider reopening throughout the country and boosting the demand outlook in the world’s largest crude importer. Stimulus measures are helping the recovery in China, which has been dampened by the zero covid policy and lockdowns. 

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Meanwhile, Iraq has resumed crude oil exports from Basrah oil terminal after an oil spill that occurred late 15th September halted loadings from the facility, curbing some 1 million b/d of exports from OPEC’s second biggest producer. Global oil consumption is being threatened by a darkening economic outlook. A hawkish US Federal Reserve, looming recession in Eurozone and China’s zero covid policy might add to demand concerns. Investors await two major central bank meetings this week – the Fed and the Bank of England. Fed is expected to deliver another jumbo-sized 75 bps hike, while BoE might go for 50 bps and raise concerns of a recession. Talks of recession and aggressive rate hikes might weigh down on oil demand and prices. We recommend a sell on rise strategy and expect prices to decline towards Rs.6,500 per bbl for the week. A bounce back could be seen in the event of a less hawkish Fed. 

(Royce Vargheese Joseph is a Research Analyst, Commodity at Anand Rathi. The views expressed are the author’s own. Please consult your financial advisor before investing.)