Ravindra Rao
Crude oil witnessed a sharp sell-off earlier this year as the virus outbreak led to demand destruction. This was followed by an equally sharply rebound as OPEC and other producers aggressively cut output to rebalance the market while demand recovered with reopening of economies.
Prices have, however, turned rangebound in the last few weeks amid challenges on both demand and supply front. Global economic activity has picked up as is evident from economic data from major economies. Huge stimulus measures by central banks and governments and reopening of economies has also improved demand outlook.
However, challenges persist in the form of rising virus cases globally, especially in the US, and increasing geopolitical tensions. If virus cases continue to rise at the current alarming rate, countries may be forced to reimpose some restrictions which may hamper the economic recovery and thereby demand.
China has been in the eye of the storm as the US and other major countries have blamed Beijing for its handling of the virus situation. Additionally, US and China are at loggerheads over various other issues like Hong Kong's security law, claims over South China Sea resources, violation of minority rights of Uighurs Muslims in China, access to US financial markets etc. Both are taking action against each other and if tensions continue to rise, the nascent trade deal may also come under scanner.
On the supply side, US crude production has fallen nearly 20 percent from record high levels as lower prices forced producers to reduce spending and drilling activity. With stable prices and improving demand, market players are expecting producers to bring back some production online.
Recovery in crude oil price and global demand has also fueled expectations that OPEC may reduce the pace of production cuts. OPEC and allies deal calls for a 9.7 million barrels per day production cut till July 2020. If the deal is not extended further, the oil producer group may reduce the production cuts to 7.7 million barrels per day from August till December 2020.
The recent weakness in crude price shows that market players have factored in that OPEC may reduce the pace of cuts. Further clarity will come from OPEC's review committee meeting on July 14-15 as the group may make recommendations for production policy.
Overall, crude oil rallied sharply on concerted measures by governments to boost economic activity and oil producers to reduce supply. With both sides looking at scaling back support and increasing risks from rising virus cases, crude oil has turned rangebound but is yet to see a significant drop. A significant fall may materialize only if we see rising virus cases dampening economic activity again or if there is a major sell-off in equity markets.
The author is VP - Head Commodity Research at Kotak Securities.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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