Geo-political tensions could keep crude prices elevated in the near term: Report

The conflict in Israel remains in place, although that is unlikely to adversely affect the crude oil supply. However, the bigger development has been the US government’s efforts to continue to target Iranian proxies in the Middle East in retaliation for a suicide drone strike in Jordan, said ICICI Bank Global Markets in its latest report. 

Houthi militants in Yemen continue to target shipping vessels in the Red Sea, despite US airstrikes, raising concerns about further disruptions to supplies from the region.

Also Read: IOC, HPCL, BPCL shares baking-in high margins, steep premiums, says CLSA

The crisis in the Red Sea shipping route began after Yemen-based Houthi rebels launched frequent attacks on commercial shipping vessels plying through the route in November as a fallout of the Israeli-Palestine war, which started in early October 2023.

So far, supply disruptions haven’t materialised significantly, which is limiting the upside in Brent crude oil prices. However, two key risks persist potential disruptions in crude transportation through the Strait of Hormuz (20 mbpd) or the Suez Canal (5 mbpd), accounting for a combined 25% of total oil supply, and the involvement of major oil producers like Iran, Iraq, and Saudi Arabia in a conflict. Although the likelihood of such an event remains low for now, as stated by ICICI Bank Global Markets. 

Also Read: India’s crude oil output up 0.7% to 2.5 MMT in January, imports rise 5.7% YoY

Excess supply of crude oil in physical markets

As far as global supply is concerned, ICICI Bank Global Markets said that there has been a notable drop in OPEC+ crude oil production in January, marking the steepest plunge in six months. 

However, the decline fell short of the approximately 700 kbpd in cuts pledged by the group for Q1 2024. In January, OPEC+ crude output witnessed a decline of 420 kbpd. Factors contributed to the production decline, including protests leading to the shutdown of Libya’s Sharara oil field as well as voluntary cuts by Kuwait and Iraq. 

Despite agreeing to significant output reductions at the last OPEC+ meeting, both countries exceeded their quotas in January. 

Also Read: Petroleum exports drop sharply as West tightens squeeze on Russia

The shortfall in January’s production cuts, as per ICICI Bank Global Markets, may impact OPEC+ members’ market share, especially amidst surging crude output from non-OPEC countries like the US, Canada, Guyana, and Brazil.

On aggregate, the global supply of crude dropped by 1.6 mbpd on a sequential basis in January, which was not enough to offset the decline witnessed in demand. The net result was an excess supply of 0.6 mbpd in the crude oil physical markets in January 2024, it stated. 

EMs to drive the crude demand

“Our global demand-side projections for crude oil have remained unchanged from the past month and reflect our expectations of a global soft landing. We see demand picking by 1.1 mbpd in 2024 compared to 1.9 mbpd witnessed over 2023, reflecting sluggish global growth projections for 2024 of 2.8% YoY from earlier 3.0%,” said ICICI Bank Global Markets. 

It expects emerging markets (EMs) to drive the demand higher, led by India and China, and it projects US demand to pick up marginally, while demand in Europe is expected to remain flat. 

Also Read: India oil product demand up 8.2% in January, says report

“The risks to the demand outlook remain fairly balanced at this point in time, depending on the materialisation of Chinese stimulus driving demand higher and the lagged impact of monetary tightening leading to a much more acute slowdown in global growth than we expect,” it added.

Crude prices outlook

ICICI Bank Global Markets has maintained its trading range for Brent crude prices between USD 75/bbl and USD 85/bbl. This is based on the expectation that physical markets will likely remain oversupplied by approximately 0.1 mbpd.

Their forecasts implicitly assume that OPEC+ members will extend production cuts beyond April 2024. If that does not happen, it would imply a higher net supply surplus, limiting further upside potential from current levels. It says that the ongoing geo-political tensions could continue to drive interim volatility, keeping prices elevated in the process. 

Also Read: Government marginally raises windfall tax on domestic crude oil

There were also episodes of US commercial crude oil inventory drawing higher than expected, giving hopes that demand would normalise in the upcoming months. However, the upside bias has remained capped, reflecting expectations of an oversupplied physical market, as stated by ICICI Bank Global Markets.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 22 Feb 2024, 12:12 PM IST

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