Crude oil outlook turns bullish on recovering demand, analysts expect higher levels

Crude oil had a choppy trading week and ended with modest gains on weaker dollar, prospects of increasing demand from US, China and Europe, falling oil inventories and increase in refinery utilisation rate in the US, rise in China’s oil imports, vaccination drive across US and China are the current push factors at play for the black gold.

Crude oil jumped Rs 25, or 0.53 percent, during the week and rose during four out of five trading sessions on the domestic bourse.

The market initially shrugged off worries about the Colonial Pipeline shutdown and a potential US demand growth lent support.

The number of rigs drilling crude oil in the US increased by 8 to 352 for the week to May 14, the highest since April 2020, said Baker Hughes in a weekly report.

The CFTC data showed that money managers decreased their net long positions by 24208 lots in the last week.

The ‘black gold’ has been trading higher than 5, 20, 50, 100 and 200 days’ simple moving averages and exponential moving averages on the daily chart. The momentum indicator Relative Strength Index (RSI) is at 54.57, indicating positive movement in prices.

Tapan Patel, Senior Analyst (Commodities), HDFC Securities said, “Crude oil prices reported third weekly gains on strong fundamentals despite India pandemic worries. Crude oil prices got a major boost from the supply disruption of the Colonial pipeline. The pipeline was downed by a cyber-attack and reopened after its operator reportedly paid a $ 5 million ransom to the hackers of its system. Crude oil prices traded higher after OPEC and IEA kept a higher demand outlook in the second half of the year. The upside in oil prices is still capped on worries over slower demand from pandemic hit India.”

“Crude oil prices may keep form trading range in coming week with the opening of the economic actives in Europe and UK. China’s action to curb inflation due to surge in commodities may have some impact on oil prices,” Patel noted.

Fundamentals

OPEC stuck to its prediction of a strong recovery in world oil demand in 2021 as growth in China and the United States counters the coronavirus crisis in India.

The US Energy Information Administration (EIA) said that gasoline consumption in the US will average almost 9 million barrels per day (bpd) this summer, between April and September, which is 1.2 million bpd.

The International Energy Agency (IEA) said oil demand is already outstripping supply and the shortfall is expected to widen even if Iran boost exports as vaccinations against COVID-19 bolster the global economy.

The agency said that output lagged demand by around 150,000 bpd in the second quarter and that shortfall is expected to widen to 2.5 million bpd by year’s end.

The price saw correction from the high of the week on Thursday as India’s COVID crisis deepened and the key US pipeline resumed operations. Concerns are growing that the spread of the virus in India and Southeast Asia will dent oil demand and weighed on prices.

Crude oil delivery for May climbed by Rs 114, or 2.44 percent, to end at Rs 4,786 per barrel with a business turnover of 2,570 lots. The same for June delivery soared by Rs 109, or 2.32 percent to Rs 4,805 per barrel with a business volume of 3,841 lots.

The value of May and June’s contracts traded on Friday was Rs 2,694.58 crore and Rs 830.25 crore, respectively.

West Texas Intermediate crude gained 2.65 percent to settle at $ 65.51 per barrel, while Brent crude, the London-based international benchmark surged 2.65 percent to $ 68.83 per barrel.

Outlook

Sriram Iyer Senior Research Analyst at Reliance Securities

As economies open in the US and Europe, pend up demand from these nations will lend support as the driving season in the United States gather momentum. So, the downside will be limited.

On the other hand, the current factor which is impacting fuel demand in India is lockdown to curb the spread of the virus. Additionally, the current rate of infections is not plateauing in the country which suggests lockdowns to be extended by month-end.

The recovering demand in other nations could offset concerns weak demand from Asia, so we could see another range-bound week for crude in the coming week.

Prathamesh Mallya, AVP Research Non-Agri Commodities and Currencies, Angel Broking Ltd

Spate of optimism have been surrounding oil prices as a third of US residents have been vaccinated. The United States has administered 245.6 million doses of COVID-19 vaccines in the country as of Sunday 2nd May 2021, according to the U.S. Centers for Disease Control and Prevention (CDC).

China has administered 275.34 million doses of COVID-19 vaccines in the country as of Sunday, according to the National Health Commission. That compares with 270.41 million doses given as of Saturday, up around 4.93 million doses.

Technicals and Strategy for Next week

“On the charts, WTI Crude oil holds support zone near $ 62.80-63.20 levels from where it could bounce back up to $ 66.60-67.85 levels in the coming week. MCX Crude Oil May holds strong support near Rs 4,640-4,560 levels where it could bounce back up to Rs 4,880-4,950 levels”, Iyer added.

Reliance Securities advised its clients to buy Crude Oil May near Rs 4,680-4,690 with a stop loss at Rs 4600 and a target at Rs 4880.

Mallya expects WTI oil prices (CMP: $ 64/bbl) in the international markets to head higher towards $ 70/bbl from a month perspective while MCX oil futures (CMP: Rs 4,788/bbl might move lower towards Rs 5,100/bbl mark in the same time frame.