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Mumbai : Emkay Wealth Management, the wealth management and advisory arm of Emkay Global Financial Services has released a note on crude oil, price outlook, and the reason hindering the rally in the commodity despite the current setup.

Brent prices supported by supply constraints

The crude oil prices have been trading in the range of $65-120/bbl in the past 1 year. The prices are way off the high levels witnessed in the month of June 2022. Brent crude is currently at around US$ 92 per barrel at a critical level. This is because of three reasons. 1) The first is the likely onset of the winter season and the expectations of a strong one which would require higher consumption of fuel for heating devices. 2) The holiday season is going to be on in the next two months and that is the time most people would take to the highways given the fact that the pandemic prevented mobility in the last two years. 3) Most important factor that may impact prices is the oil supply from Russia which will be curtailed by almost 50% by December of this year. This is because of the disagreement on European countries' proposed capping of the price of Russian oil.

At the same time, it is reported that the purchase of oil by some countries from Russia including India is likely to be stopped due to the high freight which borders on almost an additional $7-8 per barrel which makes it more expensive compared to the supplies from the Middle East or Africa. Therefore, it is highly likely that the supply from Russia may be around 2.50 million barrels per day.

Yet another fact concerning supply is that the OPEC output is still about 3 million barrels per day short compared to the target. This shortfall has been met with the supply from the Strategic Petroleum Reserve (SPR) of the US on a weekly basis. In the last couple of weeks, the release from the SPR has been to the tune of 7 million barrels for commercial use. The SPR level is at its lowest level in recent history. According to some reports, the US would replenish the stock that has been released in any case at some point in time. The US will have to move into replenishing the stock once the oil price touches lower levels. It is a fact that close to 15% of the global energy demand has been shifted to renewable and non -conventional energy sources in the last decade.

Crude prices likely to stay elevated

Despite the strength of the US Dollar as indicated by the Dollar Index, oil prices are expected to stay northbound mainly on the account of supply-restricting factors, and therefore, we could see a retest of higher levels in the coming weeks.

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