WTI, Brent crude oil prices enter 'oversold' zone; check levels for June 6

Commodity outlook: The economic slowdown has already been priced in by the markets and we expect limited downside in oil prices

Crude oil demand sentiments darkened 

Oil prices bounced back on Wednesday, despite the jump in US weekly inventories, as the WTI settled up 1.1 per cent at $74.07, recovering from four-month lows of $72.82. Oil prices are down 3.5 per cent this week and have lost 12 per cent of its value since start of Q2, wiping out most of the gains of Q1.

The deteriorating industrial demand due to economic slowdown in the last two months, along with de-escalation of geo-political risks in the middle east had already started hurting the bullish sentiments, as WTI retraced from the highs of $86/b to trade just under the $80 ahead of the OPEC meeting on June 2. Crude oil prices, too, have taken a step back following OPEC+’s surprise decision to begin gradually phasing out additional voluntary supply cuts of 2.2 mb/d in October.

It appears cartel members are increasingly unwilling to hold back production with an eye on regaining market share. Even the decision to discount the official selling price to Asian buyers by Saudi Arabia for the first time in five months is reflective of the economic slowdown.

The EIA weekly crude inventory report showed 1.2 million barrels of addition into US commercial reserves, gasoline stockpiles jumped 2.2 million barrels, while distillate fuel rose by 3.2 million barrels-a visibly bearish report as inventories surged across the product line but that may be due to refiners operating at 95.4 per cent of operable capacities, keeping in mind the summer demand and upcoming hurricane season, which may disrupt the production line later, but gasoline demand during the memorial day holiday in US disappointed at 8.9 mbpd, signalling a weak start to the summer season.

The recent economic data from the US, showing cracks in labour market as job openings slowed to 8.059 million in April, it lowest since Feb 2021, while ADP May hiring at 152K is at weakest in four months, the construct spending have slowed in the past two month and  the ISM factory activities in May remained in contraction for second straight month, only seven of the eighteen major manufacturing industries reported growth in May. We expect slowdown in consumer spending in coming months.

Outlook:

We believe the scale of the sell-off at the front end of the forward curve is overdone. The economic slowdown has already been priced in by the markets and we expect limited downside in oil prices; although, the decision from OPEC+ warrants relatively more weakness further along the forward curve.

Speculative money, however, will be largely positioned in the nearby prompts. The technical charts also suggest that the oil market is entering oversold territory and that led to a bounce back on Wednesday. In short term, prices are likely to remain under pressure and WTI crude oil could test support around $72 followed by $70.

WTI Crude oil Jul: Support: $72-$70, Resistance: $76

MCX Crude June:  Support: 5,900, Resistance: 6,400


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Disclaimer: Mohammed Imran is a Research Analyst at Sharekhan by BNP Paribas. Views expressed are personal.