Will Iranian supply change the course of oil prices?

NYMEX WTI crude oil prices gained 36 per cent between October to December last year (from $35 to $48 a barrel), and 23 per cent between January to March this year (from $48 to $60).

In the financial year 2020-21, NYMEX crude

prices recovered from a trough to soar more than 197 per cent from $20 per barrel in April 2020 to $60 per barrel in March 2021, mainly supported by various factors such as global stimulus packages, lower interest rates by central banks around the globe, weakness in the dollar and production cuts by the Organization of the Petroleum Exporting Countries (OPEC).

Subsequently, WTI crude touched a high of $70.62 per barrel (Rs 5,150) on June 9, supported by factors such as post-Covid demand from China, improvement in EU and US economies, weakness in the dollar index, a delay in the Iran sanction removal deal and the geopolitical tensions between Israel and Palestine.

Meanwhile, large energy speculators have increased their long positions in WTI crude oil futures, according to the Commitment of Traders (COT) data of Commodity Futures Trading Commission (CFTC).

Return of Iranian supply

After the earlier restrictive conditions, now there are expectations of the return of Iranian supply in the global market. Iran and world powers have been in talks since April on reviving the 2015 deal.

According to a report by Platts, Iran has already been ramping up oil production, with its total output reaching 2.43 million barrels per day in April, up by 1,30,000 barrels per day from March and the highest since May 2019.

Much of the oil produced by Iran has gone to China. Going forward, Iranian oil coming into the market will not only just cool prices but also help India diversify its import basket. India had to temporarily halt oil imports from Tehran back in 2019.

Rise in coronavirus cases hit India’s fuel demand in April

The country’s fuel demand slumped 9.4 per cent during the month due to the second wave of Covid-19 and the resultant lockdowns in many states. As the infection continued to rise in early May, restrictions were further impacting several South Asian countries. If the infection crisis continues, Asian oil demand could lose more ground going forward.

Two major factors will drag crude oil prices in the short to medium term:

Bright spot

As restrictions ease across Europe, we are slowly seeing resurgence in fuel demand. The IEA believes Europe’s oil demand could increase by as much as 9 per cent this quarter and 4 per cent in the third quarter based on current trends. A similar trend continued in the US with indications of a recovery in domestic air travel demand. In Asia, an increase in crude oil demand in China was bullish for prices. China processed a record 232 million tonnes of crude from January to April, up 12 per cent from the corresponding period in 2019 prior to the pandemic.

There’s normally an inverse relationship between the value of the dollar and commodity prices. A weaker US dollar makes dollar-denominated assets such as oil cheaper for buyers holding foreign currencies and, hence, boosts their demand.

Technical outlook

We expect WTI crude to face immediate resistance at $72/barrel (Rs 5,260 on

). A breakout from this level could take the contract towards the $75/barrel mark (Rs 5,500 on MCX), which becomes the strong hurdle in the short to medium term.

Since a negative divergence pattern has been formed, we could expect a reversal trend. Strong support is seen at $66/barrel (Rs 4,800 on MCX). Breaking this, the price is likely to drop towards $61.50 in the short term to medium term. Traders must wait for a breakout. They could sell below Rs 4,800 levels for a target of Rs 4,500 over the next one to two months.

Alternatively, a bullish approach would be to expect a rally above the breakout of $72 in NYMEX towards the $75-76 mark. On MCX, the level of Rs 5,260 needs to be broken on the upside for a fresh rally towards Rs 5,500-5,600.

(NS Ramaswamy is Head of Commodities at Ventura Securities. Views are his own)

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