Commodity Talk: Expect range-bound movement in oil prices amid demand slowdown: Pritam Patnaik of Axis Securities

The Saudi production cut, with the other OPEC+ countries deciding to continue their proposed cuts till the end of 2024, confirms a demand slowdown. A limping Chinese economic recovery, prevailing high-interest rate regime, and early recessionary trends globally have not only shaved off actual demand off-take but also traders’ confidence in the commodity prices, says Pritam Patnaik, Head - Commodities, HNI, and NRI Acquisitions, Axis Securities.

Q: How do you see Saudi Arabia's decision to cut production, and what does it tell about the global oil demand situation?
The move by Saudi to voluntarily reduce its oil production by a million BPD in July was not entirely surprising, given the aggressive statements originating from its leadership, as a precursor to the actual event. That said, the size of the cut was higher than Street expectations.


The Saudi production cut, coupled with the other OPEC+ countries deciding to continue with their proposed cuts till the end of 2024, confirms the demand slowdown witnessed in the market. A limping Chinese economic recovery, prevailing high-interest rate regime, and early recessionary trends globally have not only shaved off actual demand off-take but also traders’ confidence in the commodity prices.

Q: Will the cut help in holding the prices of benchmark Brent and WTI?
The OPEC+ meeting-led rally is already losing steam. Post the production cut announcement, we saw both WTI and Brent benchmarks rallying, but the same was not sustained as traders seemed unconvinced that the cut was deep enough to offset the demand slowdown in the face of a slowing global economy.

Q: Where do you see the price going by the end of this year for Brent and WTI?
We expect the demand for crude to improve in the second half of the year. As interest rates peak and make way for rate cuts, this could be a much-needed respite for an ailing global economy. The Chinese economy, too, is expected to make a sharper recovery in the second half of the year, aided by improving natural demand and an accommodative fiscal environment.

Additionally, increased demand during the traditional summer driving season could help support the prices. The International Energy Agency (IEA) has warned of a looming oil shortage in the second half of the year when demand is expected to eclipse supply by almost 2 million barrels per day (bpd). We could see WTI and Brent scaling back to $85 and $90, respectively, by the end of 2023.

Q: India's oil imports saw a jump in May and now account for the largest share in terms of imports from a single country. What is the demand in the Indian context?
The Indian oil imports have been robust, with record levels imported from Russia. In May alone, India imported close to 1.96 million barrels daily, making Russia’s total contribution close to 42% of total Indian oil imports. Saudi raising its official selling price (OSP) for its flagship grade Arab Light for Asia by $0.45 per barrel could further divert imports from Saudi to Russia.

With the headline macro-economic data coming in better than expected, the Indian economy seems insulated from the global headwinds. As the economy stages a recovery, the demand is only likely to grow in the coming months.

Q: What should traders and investors do with oil?
Technically, crude oil prices are trapped within a wide range of $64-$84 for WTI and $71 and $89 for Brent. Prices will continue trading within this range as long as these levels hold. A significant breakout above $84 or below $64 would indicate a shift in price direction.

The price of crude oil domestically has been trapped within a 1300-point range, specifically between Rs 5,500 and Rs 6,800 on MCX, for the past seven months. With minimal market triggers, aside from occasional production cuts, the persistently weak demand from China and the impact of a slowing global economy offsets any potential price increases. Therefore, based on these factors, we anticipate prices will continue to trade within the mentioned range.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)