Crude price may test $106-107 levels despite correction; sanctions on Russia may affect demand-supply dynamics

Crude price may test $106-107 levels despite correction; sanctions on Russia may affect demand-supply dynamics

Crude oil prices have cooled off in the last couple of weeks, after crossing $100 barrel earlier this year. After two days of gain, oil prices fell on Friday amid concerns about a global economic slowdown. Brent is closer to the $94 mark, with $106-107 being critical levels to watch out for, according to Emkay Wealth Management. Note that this level was breached thrice in the last four weeks, and Brent has now moved lower due to the US Dollar becoming stronger which, in turn, got reflected in the oil price. The second factor behind crude price easing was that demand for oil from the two major consumers that is China and India has been gradually coming down.

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According to the report, the demand for Russian oil by China and India accounts for almost half of all oil sales by Russia. Both countries have been buying oil at a discount and the discount has progressively come down. While this may be a reason, the shut down in some of the provinces in the last three months actually accounted for a reduction in oil consumption and therefore, oil demand as far as China is concerned. “While some of the factors may keep oil prices under check, the only factor that can bring down oil prices is further strength in the US currency. But in reality, oil prices may continue to give some pain to the global economy due to several reasons,” Emkay Wealth Management report said.

Sanctions against Russia to affect demand-supply dynamics, price

According to the analysts, the sanctions against Russia are going to remain in place for a longer than expected time period, and this will invariably affect the demand-supply dynamics and therefore, the price. Additionally, the capacity of OPEC+ to expand production and supply is very limited, and it cannot be expanded in the short run as investments have not been done in this sector in the last few years. Finally, while there is fear of a slowdown in global economic growth, it may not be a deep recession, and as such there may not be much demand destruction that is going to happen compared to the situation during the pandemic, according to the Emkay report.

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Crude oil prices to move higher, may re-test highs seen earlier in 2022

The analysts stated that the potential for oil prices to move higher and to re-test the highs seen earlier or at least move closer to $106-107 cannot be ruled out. “The recent correction is on the back of weak economic data coming out of China and expectations of a production boost from OPEC+. This could be the result of active lobbying by consumers of oil,” they said. It is worth adding that earlier in June, there was an agreement to boost supply from 432,000 barrels per day to 648,000 barrels per day, and nothing much happened after that. “This is not deliberate but a reflection of the fact that probably only one or two members of OPEC+ actually have the capacity to expand production and that too in a limited way,” Emkay Wealth Management added in its report.