Interest rates

Inflation, interest rates hamper sentiment towards oil; WTI around $85

By Bhavik Patel

Crude oil was down on anticipation of demand destruction as China continued to adopt its strict Covid-by-lockdown policy. Worries over weak Chinese demand were the biggest drag on crude prices this week, as local authorities dismissed speculation that the country was planning to scale back its strict zero-Covid policy. There are also lingering worries about a global economic slowdown, due to rising inflation and rising interest rates, which have also hampered sentiment towards oil markets, leaving WTI around $85. The hybrid work environment has also weighed on demand for rough as fewer people transition due to working from home.

The US CPI was the saving grace for crude, where oil rallied along with all asset classes as inflation turned weaker than expected. The weaker-than-expected inflation data has instilled confidence in markets, including the oil market, that the Fed may deviate from the aggressive interest rate hikes of recent months. A potentially slower pace of rising interest rates could revive economic growth and oil demand growth. However, oil is not out of the woods; In the rapid spread of WTI crude oil, the difference between current and next month’s contract prices fell to 0.80 on Thursday from 1.23 in early November. A rapid downward spread is generally considered a bearish sign for prices.

The bulls will come into play in the first quarter of 2023 from December 5, the oil embargo of Russia by Europe will take place. Any price cap will destabilize the market and after the oil embargo, Russian production is expected to reach 1 million bpd. The United States will also stop selling from its strategic reserve and OPEC+ will not produce more than its quota. We now expect the combined effects of the OPEC+ cuts and the EU embargo on Russian oil to be felt primarily in 1Q23 rather than 4Q22.

In MCX, Nov Fut has support around 6900-6800 where the previous October swing low was hit. Any breakout will exceed $91.50 in WTI. The trend is still negative but we are not comfortable going short looking at the risk/reward ratio since prices are close to its support zone. We recommend waiting for the price to be in the 6900-6800 range for a long position with an expected target of 7400-7500 and a stoploss of 6600.

(Bhavik Patel, Commodity/Currency Analyst, Tradebulls Securities. Opinions expressed are those of the author.)