Crude oil likely to remain volatile ahead of US Fed meeting; $110-125 per barrel range eyed

New Delhi: Crude oil and gasoline prices have been a hot topic for almost everyone recently as the basket of crude oil that India buys has hit a decade high of $121 per barrel.

Last week the international oil prices hit near a 13-week high, underpinned by robust demand from key buyers like the US. Crude oil prices have risen sharply in the last few months, on the back of a fall in Russian exports and demand cuts in China.

WTI crude futures jumped above $120 per barrel on Monday after Saudi Arabia sharply raised prices for its crude sales in July highlighting tight global supplies even after OPEC+ agreed to accelerate its output increases over the next two months.

At the start of this week, we saw a jump in crude oil prices as easing Covid restrictions in China is expected to boost demand for oil.

A bullish factor for crude was Tuesday’s news that gunmen stormed Libya’s Sharara oil field, the country’s biggest, and forced workers to stop operations.

The oil field had only just reopened Sunday after production was halted for two months when armed government protesters forced a stop in crude oil output.

Crude oil prices fell on concern about U.S. and Chinese energy demand. In China, there is concern that new Covid lockdowns will continue to hurt Chinese demand for crude oil.

In the U.S., Friday’s Consumer Price Index (CPI) and consumer sentiment reports sparked fear of a sharp cutback in consumer spending and a possible U.S. recession in 2023. U.S. consumer sentiment fell to a record low for the series (data since 1977), illustrating consumer concern about inflation and high gasoline prices.

In addition to this Baker Hughes reported Friday that active U.S. oil rigs in the week ended June 10 rose by +6 rigs to a 2-1/4 year high of 580 rigs.

U.S. active oil rigs have more than tripled from the 17-year low of 172 rigs seen in Aug 2020, signalling an increase in U.S. crude oil production capacity

Crude oil has support from ongoing concern that Russia may use energy as a weapon against countries that imposed sanctions for its attack on Ukraine.

Russia halted natural gas shipments to Bulgaria, Denmark, Finland, the Netherlands, and Poland for failing to pay for Russian gas supplies in rubles. Russia is trying to force its European customers to pay rubles for its oil and gas exports.

On the demand side, we believe the weak global growth outlook would not be sufficient to rebalance inventories at current crude oil prices.

As a result, we believe oil prices need to rally further to normalize the unsustainably low levels of global oil inventories, as well as OPEC and refining spare capacities.

We expect crude oil to remain volatile in the coming week ahead of the US Fed meeting outcome. A close watch at the levels of $110-$125 for taking fresh positions in the crude oil is suggested, either side breakout of the range would give further directions.

In the domestic market crude oil is looking more bullish than international due to rupee weakness, till crude oil price sustains above Rs 9120 level we might see prices could touch Rs 9650, sustain above Rs 9650 level might see level of Rs 9820 & Rs 9940. We suggest traders to trade cautiously in crude oil in this week.

(The author is VP commodities, Mehta Equities Ltd)

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