Oil prices extends over 1% drop on China economic headwinds ahead of US Fed verdict; Brent at $81/bbl

March Brent crude futures, which are due to expire on Wednesday, fell 52 cents, or 0.6 per cent, to $81.88 a barrel. The more active April contract was down 50 cents, or 0.6 per cent, at $81.33. US West Texas Intermediate crude lost 29 cents, or 0.4 per cent, to $76.49, according to news agency Reuters.

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Both oil contracts fell by more than $1 on Monday as a deepening real estate crisis in China fuelled concerns over demand in the world’s biggest crude consumer, with a Hong Kong court ordering the liquidation of property company China Evergrande Group.

Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a February 16 expiry, was last trading 1.13 per cent higher at ₹6,471 per bbl, having swung between ₹6,313 and ₹6,484 per bbl during the session, against a previous close of ₹6,399 per barrel.

What’s weighing on crude oil prices?

-Analysts said that the ramifications of a possible collapse in China’s property sector makes moot any authority stimulus and will have very negative global shockwaves. The continuing conflict in the Middle East, however, prevented further losses.

-US vowed to take ‘all necessary actions’ to defend its troops after a deadly drone attack in Jordan by Iran-backed militants, the first US military deaths since the Israel-Gaza war began, putting markets on edge.

-“If US-Iran tensions escalate, particularly through a direct confrontation, the risk rises that Iran’s oil supply is adversely impacted,” said Commonwealth Bank of Australia analyst Vivek Dhar. Iran exported 1.2 million to 1.6 million barrels per day (bpd) of crude oil through most of 2023, Dhar added, representing 1-1.5 per cent of global oil supply.

“-At $82, we estimate Brent is trading today only about $4 above its fair value, with $2 added to account for increased freight costs,” JP Morgan said on Tuesday, adding that the geopolitical premium accounted for the rest.

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-Analysts also said the February 1 meeting of Organistaion of Petroleum Exporting Countries (OPEC) is unlikely to bring a decision on the group’s oil policy for April. But, experts hope that it could shed some light on production plans.

-Saudi Aramco, in an indication of the future demand outlook, said it had received a directive from the Saudi energy ministry to maintain its maximum sustainable capacity at 12 million bpd and not to continue increasing it to 13 million bpd. Saudi Arabia is the world’s biggest oil exporter.

Where are prices headed?

Crude oil exhibited significant volatility, with prices retracting from their recent highs amidst profit-taking activities at elevated levels, in anticipation of the upcoming US Federal Reserve meetings and a steady dollar. 

Concerns regarding Chinese demand further tempered crude oil gains. The US President announced potential retaliation against the Houthi faction, signaling a possible continuation of oil price volatility, according to analysts.

‘’The outcome of the Federal Reserve meetings will likely influence crude oil price trends. We expect continued volatility in crude oil prices. Support for crude oil is anticipated around $76.40–75.80, with resistance expected at $77.95-78.60. In terms of the INR, crude oil is likely to find support around Rs6,315-6,260, with resistance at ₹6,480-6,550,” said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.

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Published: 30 Jan 2024, 10:13 PM IST