Crude oil prices likely to remain volatile as USD trades near a 20-year high

This week, we saw crude oil prices jump by almost around 10% from Monday’s low in both international as well as domestic markets as the European Union, the world’s largest trading bloc, spelled out plans to phase out imports of Russian oil, offsetting demand worries in top importer China.

European Commission President Ursula von der Leyen proposed a phased oil embargo on Russia over its war in Ukraine, as well as sanctioning Russia’s top bank, in a bid to deepen Moscow’s isolation.

OPEC+ sees a surplus of 1.9 million barrels per day in 2022, 600,000 bpd higher from a previous forecast, amid expectations of slower demand growth this year.

The report, prepared ahead of a meeting of the OPEC+ Joint Technical Committee meeting, also sees OECD oil stocks slightly exceeding the 2015-2019 average in the fourth quarter.

The revision reflects a weaker oil demand growth forecast adopted by the Organization of the Petroleum Exporting Countries (OPEC)) in its April oil monthly report.

Prices were also supported by OPEC+ ratifying a limited production increase following the European Union’s proposed ban on Russian imports. OPEC and its allies will nominally increase production by 432,000 barrels a day in June.

However, OPEC only managed an increase of just 10,000 barrels a day in April. OPEC now expects 2022 world oil demand to expand by 3.67 million bpd 2022, down 480,000 bpd from its previous forecast.

The group cited the impact of Russia’s invasion of Ukraine, rising inflation as crude prices soared, and the resurgence of the Omicron coronavirus variant in China as reasons for the revision.

U.S. crude oil stockpiles rose unexpectedly last week, while distillate and gasoline inventories dropped again as refiners continue to boost fuel exports to a world in need of supply, the Energy Information Administration said on Wednesday.

Crude oil prices also got support as Nature Gas prices jumped more than 9% at one point to a session high of $8.169 per million British thermal units (MMBtu), the highest level since September 2008.

Natural gas jumped on prospects for increased demand for the U.S. LNG exports, while warmer-than-usual weather forecasts could increase cooling demand.

However, disappointing US data, weakness in dollar Index & Chinese demand concerns could restrict gains. The EU aims to conclude the sanctions package by the end of the week, or May 9 at the latest, according to diplomats.

Crude price also got support after a report leaked that the United States will take bids this fall to buy back 60 million barrels of crude oil for the U.S. Strategic Petroleum Reserve, the first step in replenishing the stockpile after a record-sized release this spring.

U.S. dollar index crossed 103.50 and trading nearly at 20-year highs, U.S. 10-year bond yields also crossed 3.0% and traded around 3-1/2 year highs.

We expect crude oil prices to remain volatile. The longer-term outlook for prices also remains bullish as the EU prepares for a Russian oil embargo, which could see up to 2 million bpd in Russian output lost by the end of this month.

We expected the trading range for WTI crude oil next week would be in between $100.00 to $114.50; however currency (USDINR) will play an important role to decide domestic crude oil price.

We expect oil prices to remain volatile next week. WTI Crude oil is having support at $103.80-$98.40 and resistance is at $114.5-$117.65, In INR terms crude oil has support at Rs8,240-7,870; while resistance is at Rs8,650–8,820.

(The author is VP commodities, Mehta Equities Ltd)

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