By Royce Varghese
WTI Crude oil futures fell for the fourth consecutive month in September, down by more than 11% and closed below $80 per bbl, pressured by mounting fears of a demand-sapping global recession. The black gold also witnessed the first quarterly decline in 2 years and down more than 25% in the previous quarter, giving away all the war premium, on fears of demand destruction from aggressive central bank tightening and a surging dollar index.
Central banks across the globe are hiking the interest rates, at an unprecedented quantum, which curbs economic activity and ultimately oil demand. Weak economic data from Eurozone and a slowdown in China further weighed down on the oil prices. Putting a floor under prices were concerns of further supply disruptions after President Vladimir Putin announced a partial military mobilization in Russia and OPEC+ indicated an output cut in the coming meeting.
US shale production is not rising significantly despite a government push to increase the output. Crude output was mostly hovering near 12.1 mbpd in September, however, it fell to 12.1 mbpd in the previous week. Inflation and supply-chain delays play a major role in hampering production and expansion.
Outlook: OPEC+ set to deliver the biggest output cut since the pandemic
Oil prices might have bottomed for now as supply concerns are going to rise in the coming months. OPEC+ alliance is considering slashing production by more than 1 million barrels a day to revive plunging prices when it meets on 5th October. A reduction of that magnitude would be the biggest since the pandemic and might put a floor on oil prices. The OPEC+ gathering in Vienna will be the cartel’s first in-person meeting since the pandemic. In addition, ministers plan to hold a press conference after their session.
US SPR release is also nearing an end in late October, which accounted for almost 1 mbpd of global supply since May. Together, halting SPR release and output cut from OPEC+ might add to more than 2% of global output, which is going to vanish from November onwards. Chinese demand might also increase as few Chinese state oil refineries consider increasing runs by up to 10% in October, on prospects of more robust demand and a possible surge in fourth-quarter fuel exports.
Having said that, US Labour market data can be closely watched for more cues on Fed’s rate hike path. In case data surprises on the upside, we might see a dollar rally on prospects of aggressive rate hikes from the Fed, which might limit the upside in oil prices. We expect MCX Crude oil October futures to trade in the range of Rs 6,400 – 7,300 per bbl for the week, with an upward bias.
(Royce Varghese, Fundamental Analyst, Currency & Energy, Anand Rathi Shares and Stock Brokers. Views expressed are the author’s own.)