By Bhavik Patel
In a surprising move, crude oil which started its rally from WTI $75 to $82 has once again returned back. The reopening of the Chinese economy was the main catalyst for the rally, however that fad seems to be fading away. The reversal of the zero-Covid policy of the authorities in Beijing was like a starting pistol for oil traders after a year of lockdowns and uncertainty. Now, there are also hopes that the United States could avoid a recession, even though the latest manufacturing data suggests otherwise.
Despite increasing cases in China, demand remains strong and with the EU imposing embargo on Russian fuels from 5th Feb, there will be tightness in the oil market. It’s not easy to replace Russia’s oil supply to Europe with either the Middle East or the US. Catastrophic predictions of output losses of above 1 million bpd, even up to 3 million bpd or more, have failed to materialize, but after the EU embargo on fuels kicks in, things could change.
One of the reasons for the recent correction would be recession fears. In fact after six months of 2022, crude oil started sliding on recession fears as central banks started aggressively hiking rates to combat inflation. We don’t believe prices will remain low for long as Chinese authorities have issued a massive batch of allowances for independent refiners to import crude oil. China’s reopening is expected to drive fuel demand growth after the initial exit Covid wave wanes at some point later this quarter. Crude oil imports into Asia hit an all-time high in January, rising by 11% from December, despite lower arrivals into China according to data from Refinitiv Oil Research.
Global oil demand is set to rise by 1.9 million bpd in 2023, to a record 101.7 million bpd, with nearly half the gain coming from China following the lifting of its Covid restrictions, the International Energy Agency (IEA) said in its Oil Market Report for January. OPEC+ is also dragging its feet as the entire OPEC-13 organization saw crude oil production in January drop to 29.12 million bpd due to lower output from Saudi Arabia and Libya, partly offset by slight gains among some other members.
Crude oil in MCX is in bearish trend as momentum oscillator RSI_14 is trading at 40. 6750 seems to be strong resistance as crude has reversed from that zone. The downside momentum is expected to continue till 6075-6000 where support is expected to emerge. 6000 is also the previous swing low. We would recommend to go long around that zone with expected price till 6500 and stoploss of 5900.
(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.)