Oil rises 3% on Israel-Hezbollah war, Libya oil field shutdown; how to trade? | commodities

Renewed geo-political risk

WTI crude oil prices bounced back after touching an eight-month low of $71.50 last week to trade above $77 on Tuesday amid rising geo-political tensions. Last week, Russia launched a coordinated missile and drone attack on cities and critical infrastructure in Ukraine. Israel later launched a pre-emptive strike with 100 warplanes on Hezbollah in Lebanon and declared a 48-hour state of emergency.

Separately, Libya’s eastern government said Monday morning it would halt oil production and exports. The country exports about 300 kbpd of oil. All these developments will support oil prices

Weak oil demand from China

China remains the weak link in oil demand, leading to its weak performance in recent months as data showed imports from the world’s biggest oil importer fell 12 percent in July, following an 11-year annual decline % in June, although this decline was from a record set for June 2023.

In the first half of 2024, crude oil arrivals also fell by 2.3% compared to the first half of last year. Chinese refineries produced 6.1 percent less fuel in July this year than a year earlier, marking the fourth consecutive monthly decline in output and signaling that China’s period of weak demand is not yet over.

China imported an average of 9.97 million barrels of oil per day last month, which was 12 percent lower than June’s figure and 3 percent lower than the average daily imports for July 2023.

The OPEC+ dilemma

OPEC+ is currently sabotaging 6% of global production by agreeing to cut output, which has resulted in market share falling in favor of non-Opec countries. However, OPEC is unlikely to reverse any of the production cuts it approved last year as rising output from non-cartel countries is rising, putting pressure on prices.

OPEC+ released a plan to restore crude oil production in Q4, raising concerns about a global oil supply glut. On June 2, OPEC+ extended its voluntary cut in crude oil production by 2 million barrels per day in Q3, but said it would gradually phase out the cuts over the next 12 months, starting in October. OPEC has pledged to extend its crude output cap to about 39 million bpd by the end of 2025.

Upbeat Weekly Oil Stock Data

At 426 million barrels, U.S. commercial crude oil inventories are about 5% below the five-year average for this time of year. Gasoline inventories are about 3 percent below the five-year average for this time of year, and gasoline demand has been above 9 mbpd over the past four weeks, indicating strong consumer demand that helped prices recover last week.

WTI, Brent Crude Outlook

Despite these fluctuations, the International Energy Agency expects demand growth to be just under 1 million barrels per day (mb/d) in both 2024 and 2025, well below the 2.1mb/d growth of last year, but not necessarily alarming.

Demand still appears weak to support the recent rally, while production from Opec+ and non-Opec has risen in recent months to keep the oil balance in surplus. We expect oil prices to face immediate resistance at $80, and growth would be difficult to sustain above that without a jump in implicit demand. Therefore, we expect that some moderation in prices from the current level could lead WTI to fall back to $72 in the coming sessions.

WTI Crude Oil October: Support: $72, Resistance: $78

MCX Crude Sept: Support: 6,100, Resistance: 6,600

First publication: August 27, 2024 | 10:21 AM IST