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Is the next big fall in oil coming soon?


By Prathamesh Mallya


In the past three months (June to August), crude oil prices consolidated with the brent trading in the price range of $37 and $46 range. WTI traded in the range of $34-$44, while the MCX crude oil prices traded in the range Rs 2,800-3,250/bbl in the same time frame.

This conundrum has been there on account of dilemmatic situations. The PMI numbers from the Euro, the US, Japan and China have been staging a drastic recovery while the Q-o-Q GDP numbers across the globe presents a scary situation (see graph). The US manufacturing activity accelerated to a nearly two-year high in August. The Institute for Supply Management (ISM) said that its index of national factory activity increased to a reading of 56.0 in August versus 54.2 in July. That was the highest level seen since November 2018 and marked three straight months of growth.

ET CONTRIBUTORS

On the contrary, the Organization of the Petroleum Exporting Countries and allies, a grouping known as OPEC+, are currently cutting output by 7.7 million barrels per day (bpd) until December to support prices as the coronavirus crisis hammers demand.

The US, one of the important markets for oil and the economic data, does not depict a rosy situation either. According to the ADP National Employment Report, private payrolls increased by 428,000 jobs in August 2020, and the July numbers were revised to show hiring up by 212,000 jobs instead of the initially reported number of 167,000. The US gasoline demand last week fell to 8.78 million barrels per day (bpd) from 9.16 million bpd a week earlier.

Global equities rally in double digits
Stock markets’ performance should ideally be a function of its underlying elements, i.e, the companies that make up the stock market and in a perfect world, the stock market should rally when the economy does well and vice versa. The GDP describes all the activity that happens in an economy and sums it up to one number and the quarter-on-quarter numbers discussed prior in the report and the equities performance across the globe are quite contradictory when compared to the GDP numbers.

Z49ET CONTRIBUTORS

It is common for oil markets to rally if equities continue to rally. However, the green shoots of recovery will take much longer for the economies to be back on track. In that case, the demand side recovery for oil will also take a longer time to recover.

Where is oil headed?
Money managers have been liquidating their exposures in oil in the past few weeks and as the global economic doldrums continue, the liquidations will exacerbate, pushing oil prices lower in the weeks ahead.

Weak economic growth across the globe, and a tardy labor market in the US is not a good mixture for the energy markets.

Z50ET CONTRIBUTORS

The rally in equities might fizzle out sooner than markets anticipate and if that happens, oil markets will face stronger heat and WTI oil prices might fall towards $36 and MCX oil prices might head lower towards Rs 2,600 per barrel mark in a month’s time frame.

Prathamesh Mallya is AVP – Research, Non Agri Commodities and Currencies, Angel Broking Ltd.





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