By Bhavik Patel
After the Energy Information Administration revealed that inventories increased by 3.5 million barrels for the week ending February 16, crude oil prices slightly increased yesterday. This followed a sizeable build of 12 million barrels for a week that also saw gasoline and middle distillate fuel inventories decline.
The reason behind the rise of prices despite the build up of inventory is the geopolitical concerns. Developments in the Middle East, particularly the Israel-Hamas conflict, which shows no signs of ending, have contributed significantly to the increase in oil prices.
Worries about oil demand in the light of signals from the Fed that it will not rush with rate cuts countered the bullish effect of Middle East affairs and the perception of a tightening supply situation. The tightening oil markets, which may contribute to the continuation of the oil price surge, is the brightest news for oil bulls.
According to the IEA, observed oil stockpiles around the world fell by roughly 60 mb in January, while on-land inventories reached their lowest point since 2016. The market’s ability to tighten more or less will mostly depend on OPEC+’s ability to remain disciplined and progressively unravel its production curbs.
The amount of OPEC crude oil output that would maintain inventory levels in the face of changes in non-OPEC supply, oil demand, and OPEC non-crude liquids supply is an estimate that varies widely among energy agencies. It should be noted that the current minor global oil surplus is far less than the 20-year average and is the result of seasonal weakness in the month of January.
Market is facing resistance due to weak demand scenario where Fed’s reluctance to cut rates will keep interest rates elevated owing to which the demand for crude will be affected. Travel season is over and now after Covid-19, there is no rush for tourism and so seasonally we are in that period where demand is weak. China’s economy has taken hit and that is why demand from Asia’s largest economy is weak.
In MCX, crude has supply zone around 6550-6600 and it is near to its resistance. For fresh upside, the price needs to break above the 6600 zone. On the downside, 6370 is the support where 20-day moving average is. Any correction is buying opportunity so long as 6370 is not breached. Upside is limited till 6600.
(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)