Month: October 2022

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MCX Crude oil October futures to trade at Rs 7000-7800/bbl this week; US CPI, FOMC meeting minutes in focus

WTI crude oil surged more than 16% towards $93 per bbl, the most since early March as OPEC+ agreed to cut production by 2 million barrels per day from November, in a move that threatens to squeeze supply further ahead of the winter season. That would be the biggest output cut since the start of the pandemic, though Saudi Arabia’s oil minister said the actual cut will likely be around 1 to 1.1 million barrels as some members are already pumping below targets.

Meanwhile, US weekly crude oil production was mostly hovering near 12.1 mbpd in September, however, it fell to 12 mbpd in the last week of September. US shale production is not rising significantly despite the government’s push to increase the output. Inflation and supply-chain delays continue to play a major role in hampering production and expansion.

In April, the Biden Administration announced 180 million barrels of crude oil sales for six months, from the Strategic reserves to bring the oil prices. In the past few months, DOE has been releasing SPR at an average rate of 0.85 mbpd, which helped the tight oil market. The reserves currently stand at 434 million, the lowest since 1984, and the release is set to end in late October, another bullish factor for prices.

Money managers have increased their bullish Nymex WTI crude oil bets by 19,699 net long positions to 189,361, according to CFTC data.

Outlook for the week: US CPI in focus

Oil prices might be under pressure for the week, amid intensifying concern over the impact of tightening monetary policy after strong labor market data reinforced expectations for more aggressive interest rate hikes from the Federal Reserve. US CPI and FOMC meeting minutes will be the major focus for the week, which might decide Fed’s future rate hike path. Any uptick in US inflation will lead to market mayhem. However, prospects of a tight market and rising risk premium might put a floor under prices. OPEC+ effective output cut of almost 1 mbpd coupled with SPR release accounts for almost 2% of global supply vanishing from November. We expect MCX Crude oil October futures to trade in the range of Rs.7,000-7,800 per bbl for the week.

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The rupee may fall to 83.50 in the coming days, and RBI to limit intervention to preserve foreign-reserves

Indian rupee marked a fourth weekly decline in a row following the sharp surge in crude oil prices and foreign institutions turned net sellers after the delay of India’s bond inclusion in the JP Morgan Global Bond Index. Apart from the broad-based dollar strength, the key data released this week suggest the Indian economy is slowing while the US is still on strong footing. The interest rate differential, rebound in commodity prices, and surging deficit all could weigh on the Indian rupee in the near term.

In the week gone, spot USDINR gained 98 paise or 1.21% to 82.33, the new all-time high level. The fundamentals and technical are favoring bulls in the coming days. We remain bullish on USDINR and expect levels of 82.80 and 83.50 in the coming days while on the lower side could find support around 81.10.

Currency traders are playing cat and mouse with officials abroad as foreign-reserve depletion and intervention come to the forefront. The dip-buying in the greenback against the rupee remained a popular trade last week anticipating RBI would limit intervention in order to preserve foreign-reserve balances.

The two-decade highs in King Dollar and an 18% rise in its trade-weighted index in the past year have rewritten the rules of investing in the international financial markets. King Dollar has wreaked havoc with emerging market currencies and Third World sovereign bonds. The dollar’s strength on the back of US jobs data pulled most major currencies lower last week. The dollar rally means the global economy, particularly emerging and frontier markets, face tightening financial conditions. The World Bank estimates that as many as 70 countries in the EM/frontier markets will be unable to repay almost $100 billion in sovereign debt.

Fed-hike premium continued to edge higher over the session and almost fully priced in a 75bp rate increase on Nov. 2. Stronger hikes by the Fed mean the dollar strength to continue and not only EM currency but Euro, GBP, and Yen also to remain under pressure. The key question is where the Fed terminal rate would finally be. As per the CME fed-watch tool by Feb 23 the fed rate will reach 450-475 as the base case.

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OPEC+ cuts ahead of winter fan global inflation concerns

Concerns over tight oil supplies and soaring inflation have intensified after the OPEC+ group of nations announced its largest supply cut since 2020 ahead of European Union embargoes on Russian energy. The move has widened a diplomatic rift between the Saudi-backed bloc and Western nations, which worry higher energy prices will hurt the fragile global economy and hinder efforts to deprive Moscow of oil revenue following Russia’s invasion of Ukraine.

Global crude futures jumped this week, returning to three-week highs, after the Organization of the Petroleum Exporting Countries and their allies, including Russia, agreed to slash output by 2 million barrels per day just ahead of the peak winter season. This is likely to drive spot prices higher, particularly for Middle East oil, which meets about two-thirds of Asia’s demand, industry participants said, adding to inflation concerns as governments from Japan to India fight the rising cost of living while Europe is expected to burn more oil to replace Russian gas this winter.

“We are concerned about a resurgence in international oil prices, which have shown some signs of calming down since the second quarter,” a spokesperson at South Korea’s largest refiner SK Energy told Reuters. Another South Korean refining source said the supply cut could drive prices back to levels seen in the second quarter. South Korea, Asia’s fourth-largest economy and a manufacturing powerhouse has seen costs skyrocket due to surging commodity prices. Brent hit $139.13 a barrel in March, the highest since 2008 after the Ukraine war sparked fears of Russian oil supply loss.

ACTUAL CUTS

Saudi Energy Minister Abdulaziz bin Salman said the real supply cut would be about 1 million to 1.1 million BPD, a response to rising global interest rates and a weakening world economy. That move triggered a sharp response from Washington, which criticized the OPEC+ deal as shortsighted. The White House said President Joe Biden would continue to assess whether to release further strategic oil stocks to lower prices.

“Saudi, UAE (the United Arab Emirates), and Kuwait are likely to take up most of the burden of cuts,” said Tilak Doshi, managing director of Doshi Consulting, who was previously with Saudi Aramco. “It’s a slap on Biden’s face by OPEC+,” he said, adding that ties between Russia and Saudi seem increasingly tight. While the SK Energy spokesperson expects the U.S. reserves release to accelerate ahead of the U.S. midterm elections in November, RBC Capital analysts said follow-on sales would likely be more incremental. “We are unlikely to see another blockbuster release in the near term,” the bank added.

The OPEC+ cuts compound supply concerns as European Union sanctions on Russian crude and oil products take effect in December and February, respectively. Industry participants estimate the loss of Russian crude at between 1 and 2 million BPD, depending on how Moscow reacts to the G7’s price cap on Russian oil. That policy is aimed at ensuring Russian oil continues flowing to emerging economies but at lower prices to reduce Moscow’s revenues.

“The market is still underpricing the actual loss,” said a Singapore-based crude oil trader who declined to be named due to company policy. The move by OPEC+ prompted warnings from oil-importing emerging markets, some of which have become particularly vulnerable to price shocks amid recent global supply snags. Sri Lanka is battling its worst economic crisis since its independence from Britain in 1948, with a plunge in its currency, runaway inflation, and an acute dollar shortage to pay for essential imports of food, fuel, and medicine.

President Ranil Wickremesinghe warned Sri Lanka will have to pay even more for fuel as richer countries stock up for their own needs. “This is not just an issue faced by us but several other South Asian countries,” he told parliament on Thursday. “Global inflation is going to hit us all next year.”

Eqwires Research Analyst

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