Crude oil fell 7 per cent on Friday and was down around 9 per cent for the week as a highly uncertain outlook for global growth and fuel demand following numerous rate hikes around the world this week weighed on markets.
Central banks across the world have raised interest rates this week, led by the Federal Reserve’s 75 basis point rate hike amid a global fight against surging inflation.
Analysts argued that drastic action was needed to get ahead of rising prices but warned of a higher risk of recession. The International Energy Agency (IEA) also warned on Wednesday that soaring oil prices and weakening economic forecasts dimmed the future demand outlook.
Meanwhile, investors remained watchful of supply tightness after the US announced new sanctions on Iran. This added to concerns about production shortfalls among OPEC members and disruptions caused by unrest in Libya and Russia’s war in Ukraine.
Last week on Wednesday, the latest report from EIA pointed to subdued consumption and increasing global inventories amid a worsening outlook for growth and inflation and warned that oil demand should only reach pre-pandemic levels in 2023.
On top of that, EIA data showed that US crude production unexpectedly rose to 12 million barrels a day last week, hitting the highest level since April 2020.
Still, prices are set to remain elevated as supply from key exporter Russia is set to remain low amid western sanctions due to Russia’s invasion of Ukraine. In addition to this the number of total active drilling rigs in the United States rose by 7 this week, according to new data from Baker Hughes.
After this week’s brutal sell-off, oil (WTI Futures) is hovering slightly above a major rising trendline extended off the December 2021 lows, now crossing the $106.50 area and breaking down below there could open up the possibility of a move down to the $100 level.
The $100 level is a significant area of interest, and I think that there should be plenty of buyers. If the bullish reversal scenario plays out in the coming days, initial resistance appears around the 50-day simple moving average, followed by the $112.00 zone.
On further strength, the focus shifts to $116.50. In INR we are expecting crude might take support of Rs 8,000 below this it could touch Rs 7,765 while upside resistance will be at Rs 8,650 and Rs 8,920.
Despite rising growth headwinds, oil maintains a constructive outlook. For instance, even if energy consumption were to cool on the back of demand destruction, extremely tight markets and structural shortages should cap the downside.
We anticipate that there should be plenty of support down to the $100 level, which of course has a lot of psychology tied into it as well. Buying the dip continues to be the way forward, but the volatility of course is picking up.
(The author is VP commodities, Mehta Equities Ltd)