Brent Subdued, No Fresh Triggers

Brent is trading at US$82/US$83 levels. Briefly, it had gone down to the US$ 78 level too. The supply-demand dynamics, at present, does not support much higher oil prices. While the high fuel prices and the consequent demand destruction that has happened is probably keeping the prices subdued. But this is only a temporary and short-term factor. There are already reliable reports which suggest that the gasoline demand in the US is weak, and it has led to rising stocks and may affect the industry. At some point the demand factor may come back into prominence but the factors like the still sagging growth recovery in China, the below normal consumption in Europe, and the insignificant growth in demand in India, too have cast a shadow on the future of oil prices. With the outbreak of the Russia-Ukraine conflict, there has been novel ways of accessing cheaper oil supply employed by oil consumers, which has also created new patterns of oil trade away from the traditional or normal channels. But more than anything else, the record production of oil by the US which touched 13 million barrels per day affected the supply channels. The growth in shale oil, though gradually over the last two decades, has assumed proportions which was not anticipated by the major oil producers especially in the Middel East. The impact of this supply and the self-reliance which US is seeking year after year may pose a challenge to oil prices. This points to the most likely scenario of a lower impact of OPEC + output cuts which have so far been of consequence to the market prices. There has been a build-up of short position in oil futures which are more speculative in nature, and this has also caused the view on prices to remain subdued. Yet another development is that the Petro-dollar agreement between the US and Saudi Arabia has come to an end after 50 years. This agreement has security as well as other commercial aspects. Oil sales were to be done against US Dollars, and the US was to support Saudi in its security matters like defence. Since the agreement is no longer in vogue, this may encourage invoicing of dollar sales in currencies other than US Dollar. While this may not have any direct impact on the demand-supply conditions, this opens up the possibility of oil being quoted against different currencies and the pricing may become a function of regional currency movements. While this position may be valid to a certain extent, indirectly the dollar linkage will be maintained as almost all currency majors and even smaller currencies are quoted against the Dollar. Though the weekly build up or depletion of inventory may continue to influence prices in the very short term, the broad range for oil is likely to be US$ 78 to US$ 86 in the immediate term.

Leave a Reply