Brent is Range-Bound Occasionally Tilted by Geo-Political Developments

Oil prices have been range-bound in the recent past except for the brief uptick in prices on account of the escalation of the Israel-Iran conflict. Briefly, Brent moved up beyond the US$ 90 per barrel level fearing some disruption of oil supply due to a prolonged war in the Middle East. At present it looks like both Israel and Iran have concluded their operations and therefore, there is greater stability in prices.

The more interesting fact about oil is the uninterrupted supply despite many challenges, and so long as the supply is smooth, with no significant pick up in demand, the prices are likely to remain subdued. The recent numbers from the US show a drawdown in the inventory over the last few weeks. Since these are weekly numbers not much of significance may be attributed to this. The summer season and the holiday trips are going to start soon, and many forecasts indicate some temporary pick up in oil demand in the coming weeks due to these seasonal factors. This demand pick up may spill over to the coming two months, that is May and June.

The global economy is surprisingly stronger than what most people expected, and therefore, the demand for fuel also may remain generally robust. However, the fundamental factor that is standing in the way of oil prices rising further is the belief that as inflationary pressures still continue to be a reality, the Fed may not cut interest rates in the immediate future. Only as the Fed starts cutting the base rate, there could be a decline in the dollar exchange rate and consequent rise in commodity prices including oil prices.

Despite many positive factors as enumerated above which may help propel oil prices for some time, the
sustainability of any rise in prices are singularly dependent on demand factors. This takes us to the
conclusion that while the positive factors may hold the prices at higher levels, maintaining the prices at
higher levels is but a function of the intensity of demand growth. This aspect needs further affirmation
over the next few months. The range for Brent in the immediate term is US$ 83 to US$ 92 per barrel.

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