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Emkay Wealth Management, the wealth management and advisory arm of Emkay Global Financial Services has released a note on Brent crude, price outlook, and the reason for the rally in the crude oil prices. Brent is currently tarding at US$79 per barrel, and there are indications that it might exhibit a range-bound pattern in the near future with a downward inclination. In our previous update, we highlighted two conflicting factors influencing the trajectory of oil prices. One perspective revolves around the concept of demand destruction, while the other emphasizes the anticipated demand growth from countries such as India and China over the long term. Upon closer examination, it appears that the immediate and short-term dynamics may be influenced by demand destruction, whereas the sustained, long-term growth in demand is expected to stem from the economic engines of India and China.

The argument for demand destruction primarily stems from the widespread occurrence of high inflation across countries, with fuel prices being a major driver of this inflationary trend. The premise is that elevated prices act as a self-correcting mechanism. In support of this perspective, observations have been made regarding a substantial decline in fuel consumption in the United States during the recent holiday season. This notable reduction is believed to be a consequence of consumers exercising restraint in response to the elevated prices. The International Energy Agency (IEA) underscores this point in its report, stating that there is emerging evidence of demand destruction, citing preliminary September data that indicates a significant drop in US gasoline consumption to levels not witnessed in two decades.

The forthcoming OPEC meeting is anticipated to exert influence on oil prices, with the possibility of OPEC implementing measures such as output restriction or supply curtailment to prevent a further decline in prices, as has been done in the past. Recent data from the United States for October reveals that oil production has reached its highest levels in recent history. Since the conclusion of the pandemic, the oil rig count has more than tripled, contributing to elevated levels of oil production. There's a projection that daily oil production may reach 13 million barrels, surpassing the previous peak of 12 million barrels per day. This factor could play a crucial role in determining the trajectory of crude prices.

If fuel prices decline from the current levels, the potential positive effect on global inflation becomes advantageous for import-dependent economies such as India, China, and many parts of Europe. This development could pave the way for a more accommodative or soft money policy in the upcoming quarters.

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