Oil prices experienced a decline as the uncertain economic outlook for China took precedence over the expectations of constrained supplies resulting from extended supply cuts by Saudi Arabia and Russia. China’s economic concerns were further exacerbated by declining exports and imports in August, attributed to sluggish overseas demand and weak domestic consumer spending.
Brent crude futures witnessed a decline of 42 cents, equivalent to 0.5 percent, settling at $90.18 per barrel. Simultaneously, U.S. West Texas Intermediate crude (WTI) futures exhibited a drop of 52 cents, or 0.6 percent, reaching $87.02 per barrel, according to Reuters.
Both oil benchmarks had surged earlier in the week following the announcement that Saudi Arabia and Russia, the world’s top two oil exporters, would extend voluntary supply cuts until the end of the year. Brent crude futures, on Tuesday, rose by $1.04, equivalent to 1.2 percent, ultimately settling at $90.04 per barrel, marking its first venture above the $90 threshold since November 16, 2022. In a similar vein, U.S. WTI futures increased by $1.14, or 1.3 percent, reaching $86.69 per barrel, a level not witnessed in ten months.
Domestically, on the Multi Commodity Exchange (MCX), crude oil futures expiring on September 19 saw a decline of 0.79 percent, trading at ₹7,247 per barrel. This movement followed a session that saw prices fluctuate between ₹7,220 and ₹7,270 per barrel, relative to the previous closing rate of ₹7,305 per barrel.
Factors Influencing Crude Oil Prices
Chinese Economic Woes
In August, China’s exports recorded an 8.8 percent decline year-on-year, accompanied by a 7.3 percent contraction in imports. Although China’s crude oil imports surged during the same month, reaching 12.43 million barrels per day, the overarching economic concerns stem from subdued overseas demand and weak domestic spending.
Extended OPEC+ Supply Cuts:
Saudi Arabia and Russia surprised markets by extending their voluntary oil production cuts until the end of the year. Saudi Arabia opted for a 1 million barrel per day (bpd) reduction, while Russia curbed production by 300,000 bpd. These measures were in addition to the April cuts agreed upon by the Organization of the Petroleum Exporting Countries and its allies (OPEC+), which are set to continue until the end of 2024.
Anticipated Drawdown in U.S. Inventories:American Petroleum Institute’s report of a 5.5 million barrel decline in crude inventories last week is anticipated to lead to a drawdown in U.S. inventories. This expectation has contributed to the positive sentiment surrounding WTI crude oil futures.
Crude Oil Price Outlook:
Mohammed Imran, a Research Analyst at Sharekhan by BNP Paribas, foresees a global crude oil market balance that faces a deficit of approximately 1.5 million bpd by the end of 2023. This projection takes into account the joint extension of voluntary production cuts by Saudi Arabia and Russia, totaling around 1.3 million bpd until year-end.
However, concerns linger about potential increases in oil output from Iran and Venezuela, which could partially offset the reductions enforced by Saudi Arabia and Russia.
Ravindra Rao, CMT, EPAT, VP – Head Commodity Research at Kotak Securities, observed, “WTI Crude oil futures rose for the ninth straight day underpinned by extension of supply cuts by OPEC+. Meanwhile, Saudi Arabia gave customers in Asia and the US price hikes for its crude as supply cuts tighten the market. Saudi Aramco raised its flagship Arab Light price to Asia in October by 10 cents to $3.60 a barrel more than the benchmark, the highest since December.”
Religare Broking, a domestic brokerage firm, maintains a neutral stance on MCX Crude Oil. They highlight a “MACD Bullish divergence” indicating mild positivity. To extend gains, prices need to surpass the 7,320 region, while dipping below 7,130 may induce weakness. Religare outlines technical levels spanning from ₹6,800 to ₹7,680, with the turnaround point anticipated at ₹7,130.