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Mumbai: Emkay Wealth Management, the wealth management and advisory arm of Emkay Global Financial Services has released a note on Brent crude price trajectory, the factors that will be at play in the near future. Oil prices have been range bound for most parts of CY23. In fact, crude started the year trading in the range of 80-85 levels. It has cooled off from that level despite OPEC announcing a cut in the output earlier this month.

US & China will show the way

The fall in oil prices is primarily due to the fears of an economic slowdown that is gradually making its presence felt in all major economies. This supports the speculation that overall demand from China and India may not be as good as it has been so far. The contradictory indications coming from US economic numbers also have been at play in this movement. Currently trading at $73/bbl, the target is likely to be $80/bbl. Any downward movement in prices has seen some price action from OPEC+, and any dip from the current levels may invite further price action from the group. It may be added here that once there is a pause by the Fed, the US Dollar may weaken, and this may support higher oil prices. The Dollar Index is at its highest level in almost two months, and technically it has the potential to move up from 103.50 at present to 106.30 levels. The direction will be determined by the incoming interest rate actions.

Demand from China may improve

Interestingly, the International Energy Agency (IEA) has recently modified its energy demand forecast to a higher level by 2,00,000 barrels per day to a gross of 102 million barrels per day. The basis for this revision was the demand recovery in China post the lifting of pandemic curbs, with the China demand touching 16 million barrels per day three months back. But the latest economic data from China shows a fall in industrial activity and also a decline in retail demand. Therefore, overall, the rise in demand that is forecast may not be in line with the actual demand as time passes by. There is also a differing view which holds that though the numbers look feeble the ground realities around business and industry still remain quite sound, and there will be a comeback soon.  On the other side, the U.S. Department of Energy, recently announced that is going to buy 3 million barrels to shore up the Strategic Petroleum Reserve (SPR) for three months forward delivery. In the last year, the US had undertaken sales from the SPR to stabilize oil prices when they were moving higher. This was necessitated further by the Russian invasion of Ukraine.

A fall in Shale Gas production will push up crude prices

There is a prominent view that production of US Shale gas will fall over the coming months. One of the reasons cited is the rise in the number of drilled but uncompleted wells is rising. During and immediately after the pandemic the number of such wells increased and the lag in completion has also been high due to several economic and financial factors. The average lag which was 5 to 6 months in 2019 and early 2020 rose to 12 months and above 2012 and 2022. But this has gone back to 8 to 12 months. This may cause a further fall in shale production and may push up prices over the next two quarters.  The range for Brent may be set at $70-80/bbl.