Era of cheap crude oil ending, Russia may reduce output; prices will rebound in Feb ’23

Era of cheap crude oil ending, Russia may reduce output; prices will rebound in Feb ’23

By Bhavik Patel

Crude oil is riding on the upside momentum as China continues to relax covid measures. China announced this week of a major easing of its Covid travel quarantine rules. Another reason for jump in prices is Winter Storm Elliott knocked offline around 1.5 million bpd of refinery capacity in the U.S. Gulf Coast. Despite the soaring number of infections and disruption to industries and supply chains, oil demand could be set for a major boost in the world’s top crude oil importer after the initial Covid waves. 2023 would see a jump in crude oil demand as China will join other countries in travel relaxation.

The US is now looking to replenish their stock for SPR (Special Petroleum Reserve). US commercial crude inventories, with nationwide holdings, are at their lowest for this time of year since 2014. Why traders are bullish in crude can be seen in the spread of WTI futures. In the physical market, there is 13 cents a barrel backwardation meaning near term prices are higher than later dated ones. One week ago, futures were trading in bearish contago by 17 cents meaning later dated ones were trading higher than near term. This shift suggests supply tightness which is always bullish for the market.

In MCX, price is still trading under 20 and the 50-day moving average but momentum oscillator RSI_14 is at 50 showing a neutral trend. The bottom for the oil market is now in the rearview mirror and we might see prices continue to trade higher from February. January we might see consolidation as prices will digest the rally from 6000 to 6700 and physical demand in China will remain subdued because of the rise in infection. By February we will see the impact of Russian production cuts and rise in demand from China to take prices higher. For next week, expect the price to trade in the range of 6200-6900.

(Bhavik Patel is the commodity/currency analyst at Tradebulls Securities. The views expressed are author’s own.)