Crude oil may bounce to $72 in short-term; long-term view bearish: Analyst

Oil prices: Crude oil prices are trading sideways through the week, moving between gains and losses without a clear trend. WTI settled up 0.4 per cent at $67.16 but remained relatively unchanged for the week on Wednesday. Oil prices have recorded seven straight weekly declines since Donald Trump took office on January 20, this year, driven by concerns of economic slowdown due to the trade war.  The market balance is expected to turn into a supply glut due to OPEC+ plans to restore production. Crude has fallen more than $13 a barrel from this year’s high in January, influenced by Trump’s escalating trade war, an OPEC+ decision to increase supply, and a possible end to the war in Ukraine that would return Russian barrels to the market.

 

 

Macro-economic data

Global economic news was mixed for crude prices. On the positive side, the US Fed held rates steady, lowered growth projections, raised inflation targets, and increased unemployment figures. Most importantly, it focused on the increased uncertainty around the economic outlook, indicating a dovish stance. The market is now factoring in a 50 bps rate cut in CY25. Meanwhile, China’s February industrial production rose by 5.9 per cent year-to-date, stronger than expectations of 5.3 per cent. Additionally, China’s February retail sales increased by 4.0 per cent year-to-date, exceeding expectations of 3.8 per cent. Conversely, US economic data showed signs of soaring inflation, with import prices up by 0.4 per cent in February. Prices of imported goods from China, which were subject to higher import tariffs that month, rose 0.5 per cent, the steepest increase in almost three years, potentially impacting US consumer demand in the coming months.

 

OPEC+ to restore production

If OPEC+ fulfils its plan to boost supply every month until September 2026, the cartel would add more than 2 million barrels a day, enough to meet all the incremental demand expected in 2025 and the following year. However, non-OPEC producers are expected to add around 1.5 million barrels per day during this phase, potentially switching the market balance into a glut. OPEC+ increased its production for a second straight month in February, reaching 34.13 million barrels per day. Eighteen of the 22 OPEC+ members are participating in oil production cuts, but they overshot their combined limit by 455,000 barrels per day. Kazakhstan accounted for 43 per cent of the total overproduction, producing 330,000 barrels per day over its quota limit.

 

China boosts optimism

China’s growth remains driven by the industrial sector, with improvements in retail sales providing some optimism. However, this may ease off if the real estate sector recovery turns out softer than expected. Real estate data was mixed, with a decline in new home prices and property investment falling more than expected. Industrial production may fade in March due to frontloading after two rounds of US tariffs. Rising US tariffs and tech restrictions on China have led Beijing to increase self-reliance. Despite easing monetary and fiscal policies, China is expected to miss the growth rate of 5 per cent for 2025. Additionally, China’s crude oil imports for January and February 2025 fell by approximately 5 per cent compared to the same period in 2024, while India’s oil demand fell by 5.4 per cent year-over-year in February.

 

Renewed Geo-political risk

Crude prices found support from rising tensions in the Middle East, which could lead to disruption of supplies from the region. The US launched strikes on Yemen's Houthi rebels, and the conflict could escalate into a direct conflict between the US and Iran. Any escalation would risk trades through the Strait of Hormuz, controlled by Iran and accounting for more than 20 per cent of global seaborne oil trade. US crude oil inventories as of 14 March were 4.8 per cent below the seasonal 5-year average, while gasoline inventories were 2.7 per cent above the seasonal 5-year average, and distillate inventories were 5.9 per cent below the 5-year seasonal average. US crude oil production remained unchanged at 13.573 million barrels per day, with a slight increase in the number of oil rigs.

 

Outlook 

Crude oil futures remain in a bullish backwardation structure, with shorter-term contracts at a higher price than longer-dated ones, as we enter the peak global demand season from April to August. This could see prices making some recovery; however, the trade war remains the biggest hurdle to sustainable price recovery.  In the short term, WTI is expected to bounce towards $70-$72, while the medium to long-term outlook remains bearish, with targets of $62-$60.

 

(Disclaimer: Mohammed Imran is a research analyst at Mirae Asset Sharekhan. Views expressed are his own.)