By: Mr. Prathamesh Mallya, AVP- Research, Non-Agri Commodities and Currencies, Angel Broking Ltd

Price Movements in Crude Oil 

Brent ($39-$43/bbl) and WTI ($36-$41/bbl) oil prices have been stuck in a range of $5 since 8th September with no decisive and clear direction of trend and the dilemma for investors globally, what next. The host of factors at play in oil markets ranges from increasing Chinese oil imports into storage, the action of OPEC and allied producers to balance the oil markets, restart of Libyan oil production, worries on resurgence of coronavirus cases globally. These factors and current dynamics of oil markets are what need prognosis for further tone setting in oil prices.

OPEC actions to balance the oil markets

OPEC and allied producers have said they will do whatever it takes to balance the oil markets and the recent pledge from the cartel clearly stated as follows “OPEC+ is reducing production by 7.7 million barrels per day (bpd), down from cuts totalling 9.7 million bpd enforced from May 1 to Aug. 1. Moreover, OPEC+ is due to reduce the cuts by a further 2 million bpd in January 2021

On the other side, Libya is also ramping oil production and the output from its biggest field, Sharara, which reopened on Oct. 11, is now at around 150,000 bpd, or about half its capacity.  

The extra 2% of the excess supply ramp up by the OPEC and the restart of oil fields in Libya will fill the oil markets with more than required supplies disturbing the balance of the oil markets. The good part of this is, the demand has recovered to around 92% of the pre-pandemic levels which will ensure that the extra supplies will be absorbed by the markets.

Global uncertainty & COVID resurgence

The global tally of COVID-19 cases as on 20th October stands at around 40 million with a growing second wave in Europe and North America sparking new clampdowns. 

Moreover, fading hopes for a U.S. coronavirus aid package dealt a blow to risky assets worldwide, with rising coronavirus infections in Europe also weighing on the single currency. 

In the UK, Britain's chief Brexit negotiator David Frost said there was no basis to resume trade talks with the European Union unless there was a fundamental change in Brussels' approach to negotiations. Recent Reuters poll suggested that the Bank of England is likely to supplement its quantitative easing war chest next month to offer more support to an economy still struggling amid coronavirus restrictions on activity and fears of a no-deal Brexit. 

In Japan, the central bank is expected to cut its growth and price forecasts for the current fiscal year at next week's rate review. 

Chinese flow of oil in oil storage continues to rise

China, the world’s biggest importer of oil has increased its volume of oil imports in September and as per the Reuters calculation, the flow of crude in to its Strategic Petroleum Reserve was about 1.75 million barrels per day in September, which is slightly below the 1.83 million bpd average for the first nine months of the year, although still higher than the 940,000 bpd for 2019 as a whole. This clearly states that China's economy has shifted from being the epicentre of coronavirus worries to become a beacon of hope for a recovery for oil markets.

Where is oil prices headed?

The equilibrium in the oil markets is poised in the state of oversupply due to the demand destruction caused by the pandemic. The resurgence of COVID-19 in its second wave in Europe and North America causes further woes for the oil markets to recover and the demand recovery will falter much faster than most anticipate.

The sentiments across the globe continues to be pessimistic on account of the pandemic while the CORONA RELIEF PACKAGE in the US is the talk of the town, it remains to be seen whether they will have another booster for financial markets before the November 3rd presidential elections.

Oil prices have been consolidating in a very narrow range for the past two months now and the current dynamics of the markets doesn’t have any room for oil prices to move higher. Hence, we feel that BRENT and WTI oil prices might head for a steeper correction towards $35 followed by $33/bbl. On the MCX, oil prices might head lower towards Rs.2650/bbl mark in a month time frame.

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