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Pressure on crude oil could present a short-term buying opportunity: Read By Investing.com

Investing.com — Oil prices have eased slightly in recent weeks, nearing $75 a barrel. Citi Research, in a note dated Wednesday, sees this as a potential short-term buying opportunity, even as geopolitical tensions have eased. The brokerage identifies several factors that could lead to a rebound in oil prices, potentially reaching $80 per barrel.

The recent drop in prices is largely due to geopolitical developments, particularly in Gaza, where a potential ceasefire is in sight, reducing immediate risks. In addition, China’s economic slowdown, marked by weakened industrial production, contributed to a more cautious outlook on oil demand.

These factors led to a reduction in the geopolitical risk premium for oil, under further pressure from weak Chinese oil import data and subdued US middle distillate demand.

However, Citi Research notes that geopolitical risks are far from eliminated. The possibility of weather-related disruptions during the hurricane season, along with ongoing tensions in North Africa and the Middle East, could provide support for oil prices in the near term.

The current market positioning, which is historically short, also suggests a potential rebound, especially if Brent prices fall to the $75 per barrel level.

In the US, recent data from the Energy Information Administration (EIA) was mixed but somewhat upbeat for crude oil. Commercial crude inventories fell 4.6 million barrels to 426 million barrels, beating Bloomberg’s estimate of a draw of 1.9 million barrels, Citi added.

Refinery runs also rose slightly, with crude exports and imports rising, leaving net imports slightly higher.

Gasoline inventories fell by 1.6 million barrels, in line with the broader trend of drawing inventories for key petroleum products. Distillate stocks also fell by a substantial 3.3 million barrels, reinforcing the bullish outlook for crude oil. Despite these pullbacks, jet fuel stocks rose slightly and ethanol stocks rose, reflecting a mixed picture for refined products.

Speculative positioning in the ICE Brent complex struggled in August with a noticeable lack of enthusiasm on the upside. However, the ratio of Brent gross longs to money under management (MM) improved to 1.6 times, recovering from pandemic lows.

Technically, Brent’s 200-day moving average at $82.5 a barrel acts as a strong resistance level, while support remains around $75 a barrel. This technical setup could further encourage buying if Brent approaches the lower end of this range.

Looking ahead, Citi Research suggests that OPEC+ may face difficult decisions in the coming months. The group is expected to begin tapering production cuts in October, but if Brent prices continue to fall towards $70 a barrel, further measures could be considered to stabilize the market.

This could include extending or deepening current production cuts. OPEC+ is likely to defend the $70 a barrel level, especially given the group’s forecast of global oil demand growth of 2.1 million barrels per day (b/d), the highest forecast among the major agencies.

“Potential refiner cuts could be expected as oil cracks fell in the past week, reducing margins for refiners,” analysts said.

Refinery margins have been under pressure, especially as crude oil has fallen below $17 a barrel in recent sessions. This decline could lead to refinery cutbacks, particularly for planned maintenance in Europe, and potential disruptions to Russian exports.

Despite this, Citi Research expects a possible recovery in gasoline cracks as the winter season approaches, potentially regaining the $20 per barrel range.

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