Crude oil at 8-month low! Crucial support seen at the $80-85 a barrel for Brent

Crude oil prices have been in a downward spiral for the last three months in a row and hit an eight-month low last week. Prices have erased the entire geopolitical risk premium and are back at the levels when Russia first attacked Ukraine in February 2022.

Crude prices cruised as high as $139 a barrel during the first half of the year owing to supply constraints following Russia’s invasion of Ukraine, but a faltering economic backdrop and weakening outlook for consumption have caused a notable fall in the oil prices during the summer months.

The battle against skyrocketing inflation has unified the central banks across the globe and put them on a path of aggressive interest rate hikes, weighing on the oil demand outlook, while Russia has managed to make way past the sanctions barriers and reroute its crude oil to Asian buyers.

The US Fed has vowed to rein in inflation as a priority and a series of rate hikes in that attempt has caused the dollar to spiral to two-decade highs, exerting pressure on oil prices.

On the other hand, strict Covid-19 restrictions in China have cast a shadow on the demand outlook and recent data indicated that China’s crude imports plummeted 9.4 per cent in August from a year earlier.

The decision by the US administration in March to release one million barrels of oil per day from its strategic reserves for the next six months to pare energy inflation has also suppressed prices in recent months.

While the stated facts portray a bearish bias, the oil market is also keeping a tab on several other developments, which may provide a floor to prices in the coming months.

Last week, the OPEC and allies decided to slash October production by 100,000 bpd in a bid to arrest the slump in prices.

Though it fell short of market expectation as the cut was nominal, amounting to only 0.1 per cent of global demand, it came with a statement that the oil cartel is vigilant about the market volatility and can take further steps if required to defend prices.

Also, there is a lot of skepticism about the revival of the nuclear deal between Western countries and Iran, which would delay the expected return of around 1 mbpd of Iranian crude to the market.

Supply could further take a hit as Russia has threatened to cut energy supplies to Europe, in response to the EU proposals to impose a price cap on Russian energy exports.

Also, even as the Atlantic hurricane season has been quiet so far and is near halfway point, a landfall by any hurricane on the US Gulf or Atlantic coasts could interrupt crude offshore production or onshore refining.

Besides, the European Union is set to halt most crude oil purchases from Russia by the end of 2022, which could lead to significant supply tightness and underpin oil prices.

Following several consecutive years of underinvestment in the energy sector, global spare production capacity is also quite limited. Add to that, the US administration is not considering the further release of oil from strategic reserves beyond the 180 million barrels announced months ago, so there is a lot of uncertainty about oil supplies.

In the near term, prices are likely to take cues from the monetary policy decisions of the BOE and the US at their upcoming meetings.

The US Fed Chair and various officials through their hawkish jawboning and tough-talking have strengthened the bets of another super-sized rate hike that will set the course of the dollar and steer oil prices.

Underscoring the divergent demand-supply dynamics at play, the outlook depicts a bleak image for crude oil prices in the near term, but the longer-term outlook remains broadly positive.

Prices may remain under pressure in the coming days, but oil prices are likely to find a floor at the $80-85 a barrel zone for Brent crude from where they are likely to attract renewed buying interest.

On their way up, a decisive break of $102 a barrel could lead to a strong upside rally which could push prices higher towards $115 initially and then $130 a barrel from a medium-term perspective.

(The author is Vice President – Commodity and Currency Research,

Broking. Recommendations, suggestions, views and opinions are her own. These do not represent the views of Economic Times.)

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