Brent is trading at US$ 78 per barrel, and it looks like it may be range-bound in the immediate term with a negative bias. In our last update we had mentioned two opposing factors that are at work as far as the direction of oil prices is concerned. “There are two theories that are discussed in market circles on the future direction of oil prices. The first one focusses on demand destruction, whereas the second one places its argument on the growth in demand expected from countries like India and China in the long run. On a closer examination of the two, it looks like the demand destruction factor may come to play in the immediate term and the short term, whereas the secular growth in demand may come from the growth engines in the long run”. The demand destruction thesis is based mainly on the fact that inflation has been high in all countries, and fuel prices have been the main contributor to the high prices. And high price is its own cure.
One of the things pointed out in this connection is the fall in fuel consumption in the US during the last holiday season which has fallen drastically. Could be the result of restraint on consumption consequent to high prices. The International Energy Agency (IEA) report states, “evidence of demand destruction is appearing with preliminary September data showing that US gasoline consumption fell to two-decade lows”. Apart from this, the upcoming OPEC meet may also have some impact on prices. To prevent any further fall in prices OPEC could resort to output restriction or supply curtailment like they have done before. Actual data from the US for October shows that the oil production is at its highest levels in recent history. Since the end of the pandemic, the oil rig count more than tripled. This is pushing the oil production to higher levels, and it may touch 13 million barrels per day as against the 12 million barrels per day which was the highest so far. This could be a determining factor for crude prices. There has been no disruption of traffic in the gulf region due to the conflicts and this may not possibly be factor to reckon with immediately. While fuel prices move lower, the positive impact it may have on global inflation levels is a boon for import dependent economies like India and China, and also for most parts of Europe, and this may facilitate soft money policy in the coming quarters.
