Brent Well Supported At Current Levels

Oil prices have been pulled in different directions in the last three months. The coming into effect of the sanctions against Russia has been the singular important factor that could have affected oil prices. But prices at this juncture looks well supported at US$ 75-US$ 80 levels. It is quite possible that it could rise further. One of the factors that may contribute to this bullishness is the gradual opening up of China after the pandemic related restrictions. Latest reports point towards a softening situation in the spate
of infections that overwhelmed the available medical facilities. However, a more fundamental factor that should be recognized is that the economy of China has slowed down and the last quarter growth was close to 3.50 %. The weakness in the economy could persist for a longer while, as factory output and retail sales are falling, and still worse are the issues prevailing in the real estate sector. These things could take some steam out of the overall demand. Russia has announced that they will cut the oil output in 2023. While this may not be of much consequence at the aggregate level it may have a sentimental impact. The prospects of Fed rate hikes are still quite alive, and this may have a positive impact on dollar strength, and this could help oil prices stabilize at the current levels. Further, if there is slowdown in economic activity due to the rising interest rates there is a potential for economic sluggishness which could pull down oil demand. But the more interesting story about oil market is the oil price cap which EU has imposed on Russian oil. A deal on the natural gas price cap is yet to be worked out. In the view of many analysts the price cap is a very potent weapon and that there is no guarantee that it will not be used against other oil producing states too in future. The majority of oil producers are from the Middle East and makes up the OPEC. Any future capping of prices may lead to unrest among the oil producers and consumers. However, it may be stressed here that the success of any oil price control regimes would depend entirely on the stand taken by the two largest consumers of oil, which is India and China. The severe cold winds and snowstorms have crippled many refineries in the prime oil producing areas in the US, and it may take a fortnight before they could start normal functioning. This may have a temporary impact on output and prices. Overall Brent seems to be stable at the current levels with more of upside risks.

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