Crude oil sell-off a bit overdone as prices could be ticking back up soon, says Vandana Hari of Vanda Insights

She elaborated on the reasons for the crude reversal: “The immediate trigger appeared to be news that Libyan oil production was actually close to 700,000 bpd instead of the earlier reported 100,000 bpd, which is what the market had factored in. The oil minister of Libya also confirmed this, and while the number is still below the 1.1-1.2 million bpd that Libya can produce, contrasting with the 100,000 bpd production that the market had baked in, this was a bit of a bearish news.”

Another factor she said is the “ongoing tailspin in the broader risk assets in the US stock markets. And what likely happened was the Libyan news prompted the oil complex to start paying attention to demand”.

So, can we expect oil prices to keep moving lower then? And what about impact of the Fed rate hike, besides fears of low demand?

Hari sounded quite optimistic: “US oil demand growth has been decent, not just in recent weeks with record high pump prices in the US, but for the past 2-3 months now, it has been decelerating, but it is still not gone into negative. Not just in the US, demand globally is still holding up. I believe there's still a bit of momentum there from the pent-up demand.”

She did note that demand bulk has however shifted from products requirement in the thick of the COVID-19 pandemic to services such as travel, leisure, hospitality, and industries, etc.

“It is also the summer demand season in the western hemisphere — people take to the roads, take to the skies, travel is back in a big way. There is a fair degree of momentum and I think it is still suppliers that remain in the driver’s seat,” she added.

Hari also felt that Friday’s sell-off was “a bit overdone” and that prices could soon be “ticking back up again”.

So, at what price band should we expect prices to settle then?

Hari explained that broadly, crude prices have been in the $100-120 per barrel band since the Ukraine war and are expected to stick to that range.

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“As western sanctions against Russia remain in place, I don't see how and why crude prices can crash below $100/barrel in the short term. Yes, demand concerns are there and I do expect demand deceleration to happen, probably more towards the end of this year, so that's something out in the future,” she noted.

For the “here and now”, Hari felt that supply concerns were the immediate concern. “By no means is this energy war between Europe and Russia coming to an end. So, $100-120 going into the next quarter, and an average of around $110/barrel is what I would expect,” she added.

Status Quo

Oil prices edged lower on June 20, reversing earlier gains, as concerns about slowing global economic growth and fuel demand outweighed worries about tightening supplies. Brent crude futures slipped 3 cents to $113.09 a barrel by 0515 GMT, after rising as much as 1 percent earlier. Front-month prices tumbled 7.3 percent last week, their first weekly fall in five.

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Meanwhile, West Texas Intermediate (WTI) crude was at $109.42 a barrel, down 14 cents, or 0.1 percent, after rising more than $1 earlier. Front-month prices dropped 9.2 percent last week, the first decline in eight weeks.

India impact

Shares of Oil and Natural Gas Corporation (ONGC) and Oil India fell on June 20 tracking the sharp sell-off in global crude oil prices.

Rising oil prices had been one of the driving forces behind the outperformance of ONGC and Oil India in 2022 so far. While shares of Oil India are still higher by 18 percent this year, ONGC is down 5.5 percent after the recent correction.

Fuelling concerns over these stocks is the likely imposition of a windfall tax on the firms' earnings to compensate for the loss incurred by the government from excise duty cuts.

Brokerages still remain optimistic that crude oil prices will sustain above the $100 per barrel mark for the remainder of 2022-23 providing a boost to earnings of ONGC and Oil India. Further, domestic natural gas prices are expected to rise sharply at the upcoming September review that could further boost earnings for ONGC and Oil India.

Watch the full interview with Vandana Hari here