What next for crude oil?

Declining crude oil prices has been in the news for quite some time now.  After having started the down move in early July, crude oil prices extended the decline in September. Brent crude oil futures marked a low of $68.7 a barrel last week, the lowest since December 2021 and WTI (West Texas Intermediate) futures marked a low of $65.3 a barrel, the lowest since May 2023. Year-to-date, the former is down 8.6 per cent and the latter has lost 4.3 per cent.

The energy commodity was hit from both sides of the supply-demand equation, leading to a quick fall in prices. Considering that the prices of crude oil impacts everything from our fuel expenses and the country’s import bill to the rupee to India Inc’s profitability, here we take a look at the factors that dragged the price lower and analyse how things might pan out in the coming months.

Demand slowdown

Concerns over the potential drop in oil consumption, particularly from China, have weighed on the prices. In their latest Short Term Energy Outlook (STEO), released on September 10, US Energy Information Administration (EIA) forecasts that the global consumption will increase by 0.9 million barrels per day (b/d) in 2024 and 1.5 million b/d in 2025. From last month’s estimate, this is down 0.2 million b/d and 0.1 million b/d for 2024 and 2025 respectively.

Last week, OPEC (Organisation of the Petroleum Exporting Countries), too, cut the demand growth expectations for 2024 and 2025 by 0.8 million b/d and 0.4 million b/d to 2 million b/d and 1.7 million b/d respectively.

A moderation in Chinese demand can already be seen from the country’s crude oil imports – it dropped from 49.05 million tonnes in March to 42.3 million tonnes in July. Notably, there was a rebound in August, where the import numbers stood at 49.1 million tonnes, as per the latest data. However, reports suggest that these were orders placed in May and June when the price was trending down. So, the increase is largely believed to be due to lower prices and these stocks are expected to go to the strategic reserves of the country rather than for consumption.

Going by this, as the oil prices have dropped further now, Chinese imports might come in at higher levels in the next two-three months. But whether that is driven by increase in actual consumption is something that must be seen.

Also, in the US, the largest consumer of crude oil, as the driving season comes to an end, the demand is likely to soften. Summer driving season is generally the period between June and August, where the demand for fuel goes up. A slowdown in the country’s labour market is another concern.

Burgeoning supply

In early September, OPEC Plus, a grouping of OPEC and other nations including Russia, announced a delay in the reversal of production cuts. The group resorted to a cut of 2.2 million b/d in late 2023 to support prices. This did help in some recovery of prices – Brent crude oil futures appreciated a little over 14 per cent between January and April this year.

As things looked brighter, the group decided to reverse the cut by starting with an increase in production by 0.18 million b/d from October. But following the recent sharp fall in prices, the group has now decided to delay this until December.

Note that OPEC has not scrapped the plan but only postponed the supply cut reversal. So, the increase in output is expected to come in after a couple of months. Therefore, as one would expect, this announcement did not prop up the prices much, at least till now. As it stands, the full reversal of the 2.2 million b/d cut will be completed by December 2025.

Also, UAE, a key member within the OPEC group, has ramped up production to 4.85 million b/d from the earlier 4.65 million b/d, which is nearly 5 per cent of the global production. They plan to increase it to 5 million b/d by 2027.

In addition, there have been concerns that within the group, countries like Russia and Iraq had not actually resorted to the agreed cut in their output. They had their own reasons to overproduce. Russia, which produces over 10 million b/d, has been at war against Ukraine and oil revenue is crucial for them. Iraq, on the other hand, is attempting to rebuild the economy after facing conflicts and sanctions. Iraq’s output is around 4 million b/d. Thus, to generate revenue, these nations have not really adhered to the agreed cut, which had kept the supply at ease.

Even if the output from OPEC is kept at the current level, strong production growth is expected from non-OPEC countries. So, on the supply front, things look comfortable and there are expectations that the oil market might even end up in surplus in 2025.

As per the data by EIA, in the US alone, the supply is expected to exceed demand by nearly 2.5 million barrels a day in 2025. The surplus stood at 2.2 million barrels a day in 2024. That apart, the combined production of other countries in the Americas like Canada, Brazil and Guyana is expected to go up from 11 million b/d in 2024 to 11.7 million b/d in 2025.

The expectations of supply growth being higher than demand growth led to traders taking short positions, which further weighed on the prices recently. The COT (Commitment of Traders) data by CFTC (Commodity Futures Trading Commission) shows that money managers increased their net short on Light Sweet crude oil WTI futures from 27,555 contracts on July 9 to 47,120 contracts on September 10.

Potential upside triggers

With a demand cool-down and an increase in supply, prices can remain depressed. But there are some upside triggers. Political unrest in Libya, a member of OPEC, resulted in disruption of oil flow out of the country. While the country produced 1.1 million b/d in the first half of 2024, for the remainder of this year, EIA forecasts the output to drop to 0.6 million b/d, taking away about 0.5 million b/d of oil supply. This along with a further delay in output increase by other members of the group, might support prices in the coming months.

Another factor is the impact of hurricane Francine which made its landfall in Louisiana, in the US, a few days ago. Potential supply disruption from this region can have an impact on the prices because as some reports suggest, nearly one-fifth of US crude oil production is from this region.

Apart from this, two ongoing conflicts — Russia-Ukraine war and Israel-Hamas war — are potential threats to the global oil supply chain. Although the war risk has been in existence for some time, if the conflict escalates and expands, it can disturb the global oil flow, potentially lifting the prices higher.

While the above are supply factors, the demand can get a boost if the US Fed cut rates and supports the economy.

Price trajectory

Estimates by EIA show that the global crude oil inventory has been falling by 0.9 million b/d in the third quarter of the current calendar year. In the first quarter of the next year, the inventory draws can increase to 1 million b/d.

In addition to the inventory draws, if there are disruptions in supply from the US due to the Francine hurricane along with a reduction in output from Libya can put some upward pressure from the current level.

Nevertheless, the demand can remain subdued, and the production is expected to outpace consumption in 2024. EIA expected the total global demand and supply both to be at 104.6 million b/d.

So, overall, EIA projects the price to recover from the current level and average at $82 in December and $83 in the first quarter of 2025. For the full year of 2025, they forecast the price to average at $84.

Indian perspective

Crude oil consumption in India is projected to go up from an estimated 5.6 million b/d in 2024 to 5.8 million b/d in 2025, according to EIA. As most of the oil consumed in the country is imported, a fall in prices is a positive factor for consumers as well as the rupee.

From the perspective of businesses, lower crude oil prices are negative for exploration companies like ONGC and Oil India as their earnings can take a hit. On the other hand, aviation companies like InterGlobe Aviation can benefit, as fuel cost is about 40 per cent of their total expenses. Also, industries like paint and tyres can also see a reduction in cost, as derivatives of crude oil are crucial inputs for them.

What the charts say?

Brent Crude futures: Since November 2022, Brent futures has largely been oscillating between $70 and $86, barring a brief movement above $86 a couple of times. The chart shows that $70 has been acting as a good support zone over the last three years. So, a breach of this level is less likely. Currently trading at around $72, there is a good chance for the price to go up.

However, the rally can be capped at $86. Above $86, there is another resistance at $90. Only a breakout of $90 can turn the trend bullish. If such a move occurs, Brent futures can appreciate to $100. The price band between $100 and $102 is a resistance.

On the other hand, if Brent futures slip below the support at $70, the downswing can quickly extend to $60, a support. Subsequent support is at $50.

As it stands, the likely trajectory is that Brent futures will rise to $80-82 and then gradually move back down to $75. Yet, broadly, the prices are expected to remain within $70 and $86, and the direction of break of this range will determine the next leg of trend.

MCX Crude oil futures: After rallying till April this year, the crude oil futures on the MCX started to decline. It fell off the resistance at ₹7,000. However, the support at ₹5,500, which has stayed valid since 2022, limited the downside.

While only a clear breakout of ₹7,000 can turn the trend bullish, there still is room for a minor rally from here. From the current level of ₹5,775, the contract can move up to ₹6,400-6,500 price region and then decline again, possibly to ₹5,800. Even then, a break below ₹5,500 is less likely.

So, like Brent futures, MCX crude oil futures is likely to stay in a price range, which is ₹5,500-7,000. A break of this price band will give us cues about the direction of the next leg of trend. Notable resistance above ₹7,000 is at ₹7,700, whereas support below ₹5,500 is at ₹4,700.