By Bhavik Patel
Crude oil may face headwinds in the form of strong US dollar and global slowdown but it will have tailwind as global production is set to tighten later in the year with no substantial production increase coming from anywhere. Russia is already cutting its production by 5,00,000 bpd due to sanctions. OPEC had resisted to boost its production despite crude shooting around $120 when Russia invaded Ukraine.
Now that prices are around $80, there is no incentive for OPEC to boost its production but they will be looking to cut to increase the prices. OPEC had never complied with their quota even when they started to increase their production. The US managed to bring the price down by selling crude from its strategic reserve which is now at 40 year low. The US oil industry will see lower production growth this year and next before a potential return to stronger growth as prices rise. US inventory has been increasing since the last eight weeks but now there are signs of inventory build up.
Crude oil also got a boost after stronger than expected Chinese PMI came this week which showed that demand for crude in China will rebound. Additionally, the index for non-manufacturing sectors also jumped, signaling an overall expansion of the Chinese economy in February. At the end of 2022, supply was in line with demand and that brought prices down. But the increase in supply was not through investment but through China contracting. Lockdowns were there which put a stop to any demand coming from China. Now, as China comes back, OPEC loses that spare capacity and we will be back to the same problems we had before i.e. supply constraints.
In MCX, March contract Crude oil is still stuck in range of 6200-6650 while in WTI, it is stuck in range of $73-80. Momentum oscillator RSI_14 is above 51 so trend is neutral to positive. Immediate trigger for crude would be direction of US dollar and next week we have US Fed’s chairman Powell’s testimony on 7th March and US employment number on 10th March which will sway US Dollar and by extension crude price movement. Any dip near 6300 could be used to buy with stop loss of 6200 and expected target of 6480.
(Bhavik Patel, Currency and Commodity Analyst, Tradebull Securities. Views expressed are author’s own. Please consult your financial advisor before investing.)