Crude oil prices near 2-month lows. What’s next?

Oil prices dropped to a near two-month low on receding tensions in the Middle East, a complex interplay of escalating supply levels, demand worries, and challenging economic indicators.

The global benchmark, US WTI crude currently clinging below $80 a barrel, has lost more than 10% from a near two-year high tested last month. A similar correction was witnessed in the Asian Brent and the domestic MCX futures as well.

There were worries that the ongoing Israel-Hamas war would spread across the Middle East after Iran attacked Israel in the second week of April. This sparked a rise in the global oil prices in hopes that it could adversely hit the critical maritime routes and affect the global oil supply chain.

However, attempts by various countries to cool down the tensions put downward pressure on global oil prices now. In April 2024, global leaders, including the US and Europe urged Israel to show restraint in response to rising tensions in the Middle East. Egypt has taken the initiative to restart peace talks between both countries and the US urging Hamas to accept Israel’s ceasefire for hostage offer.

Bearish sentiment is building up in oil markets on worries that supply will outstrip demand. The recent US data reported a surprise rise in crude oil inventories. A surge in supply coupled with a noteworthy increase in US production suggests an oversupply in the market. The US Fed’s decision to retain high interest rates points to ongoing concerns about inflation and economic instability is also influencing market sentiments. Higher rates would strengthen the US dollar, making oil more expensive for holders of other currencies which may potentially reduce the demand. In addition, a high-interest rate environment affects consumer spending and business investment, further dampening the demand. A rise in US crude inventories indicates declining demand from the world’s largest oil consumer. As per IEA data, global demand growth is currently in a slowdown and is expected to ease to 1.2 million barrels a day this year. Production policies of OPEC countries also influenced the prices. In response to the oversupply and faltering demand, the OPEC+ countries have reduced production by 2.2 million barrels per day into the second quarter or mid-2024. However, the OPEC+ recently signalled the possibility of extending its output cuts. This initiative is aimed at stabilizing or increasing oil prices by limiting the available supply.

There are also reports of that the US government potentially buying oil to replenish strategic reserves if prices drop below $79. Such actions could support the prices by enhancing demand for surplus stocks.

The ongoing supply-demand dynamics are not promising for the oil prices. The possibility of supplies beating demand is likely to dampen the prospect of oil. Looking ahead, traders would cautiously track the ongoing geopolitical crisis, global growth outlook, the performance of the US dollar, and the Fed’s rate cut decisions to set a direction for oil prices.

On the price side, firm support for NYMEX crude is seen at $74 a barrel, breaking of which could weaken the sentiments further. At the same time, consistent trades above $82 could possibly lift prices higher but are unlikely to break the recent highs. In the domestic market, MCX June futures have support at Rs 5800 and resistance at Rs 7200.

(Hareesh V is Head of Commodities, Geojit Financial Services)