By Bhavik Patel
Start of 2023 was not auspicious for crude as it had reversed all of its gain it gathered in Dec 2022. Concerns over the rapid expansion of China’s COVID cases, following the relaxation of strict zero-COVID policies have continued to weigh heavily on oil prices. More relief in form of higher demand is expected thanks to the Lunar New Year travel providing a short-term demand boost. It is world’s biggest migration and we anticipate demand will increase during these periods. The Civil Aviation Administration of China (CAAC) has predicted that passenger flights might reach 88% of their pre-pandemic levels by the end of January.
We believe the worst is over for Crude as the only downside from here would be global recession. The prolonged selloff could have reached an inflection point and the seven-month long downwards trend is likely to falter now. Demand growth for 2023 could be stronger in the second half of the year as world’s central banks would start loosening the monetary policy from that time onwards.
Oil price is expected to test $100 in 2023 and could touch as high as $90 on the back of a dovish pivot in the U.S. Federal Reserve and economic reopening by China. In very short term, there isn’t room for strong upside as Brent futures prices slipped into backwardation which indicates oil price will be lower in future than current prices. High inventory is also not helping the case as at 439.6 million barrels, inventories of crude have turned about 1 percent above the average for this time of the year. The American Petroleum Institute estimated that crude oil inventories in the U.S. had added an impressive 14.87 million barrels in the first week of 2023.
Wild card would be also implementation of price-cap on Russia due in February. That would choke some supply out of the market which is positive for crude. Rs 5800-6000/bbl is proving to be strong support for crude in MCX. The recent low in Jan was 6019 and previously too in late 2022, we saw crude bounce from levels of Rs 5850/bbl. So near term bottom is around Rs 6000/bbl levels while upside seems to be capped around Rs 6700/bbl. Once again crude has started its upward rally after taking support around Rs 6019/bbl while momentum oscillator is showing sign of strength as it is around 50. We would recommend going long around levels of Rs 6250/bbl with an expected upside target of Rs 6500/bbl and stop loss of Rs 6075/bbl.
(Bhavik Patel, Currency and Commodity Analyst, Tradebull Securities. Views are author’s own. Please consult your financial advisor before investing.)