Commodity Talk: MCX crude oil contracts fall 10% amid ongoing turmoil. Is it time to sell amid the rally?

With a fall in prices, the value of the contract of the product It has dropped 10% in the last few days, Navneet Damani, Vice President of Raw Materials Research at Motilal Oswal Financial Services he said, recommending that investors take advantage of this recession by strategically positioning themselves to benefit from falling prices.

Extracts:

While crude oil has been on a slippery slope, Brent crude oil The drop below $70 a barrel on Tuesday was the first since December 2021. Where do you think prices will bottom out?
Crude oil prices have fallen to levels not seen since December 2021 as demand concerns overshadow supply disruptions and geopolitical tensions. The slowdown in the US and China has been the main driver of the fall, with added pressure from investment banks predicting that prices will remain subdued in the next quarter. Market sentiment remains cautious, especially as China’s stalled recovery has shaken investor confidence in its economy. Prices are likely to find support around Rs 5,500 on MCX and $65 on NYMEX WTI. However, while possible OPEC+ production cuts and a possible 25 basis point rate cut may provide temporary relief, overall market fundamentals suggest continued bearish pressure. Ample supply and weak demand growth projections are expected to keep prices subdued in the near term.What will be its impact on the commodity markets and crude oil contracts In terms of volumes and value?
Crude oil has been range-bound for much of the year and has recently seen increased volatility amid the ongoing sell-off, creating an attractive opportunity for traders. With prices falling, the commodity’s contract value is down 10% over the past few days, and investors can capitalize on this drop by strategically positioning themselves to profit from falling prices. Volatility is a friend of options buyers and these directional plays with volatile bouts in between will keep trading volumes elevated with added interest from futures and options traders. This increased volatility provides a window for short-term trading, allowing for potential profits as the market reacts to weak demand signals and broader economic concerns.While we know that US and Chinese consumption are triggers, what could be the magnitude of the impact?
China’s domestic consumption remains a key area of ​​concern, as it is impacted by uncertainties in the housing sector and a slowdown in discretionary spending. While the Chinese government has implemented measures aimed at stimulating domestic demand, the current scale of these efforts may not be sufficient to drive a substantial increase in consumption in the near term. The Energy Information Administration (EIA) forecasts that China’s consumption of petroleum and liquid fuels will grow by around 0.1 million barrels per day in 2024 and 0.3 million barrels per day in 2025.

Meanwhile, OPEC revised its outlook for global oil demand, citing China’s slowing economy. OPEC now expects daily oil demand to grow by about 2 Mbpd in 2024, down 80,000 bpd from its previous forecast. This adjustment underscores the significant impact of China’s economic slowdown on the global oil market, as weaker demand from one of the world’s largest consumers contributes to a more cautious outlook for oil demand growth.

In the United States, oil demand is expected to stabilise at 20.3 million barrels per day, down slightly from the previous estimate of 20.5 million barrels per day. However, the Energy Information Administration (EIA) has maintained its 2025 forecast at 20.6 million barrels per day, indicating that demand is not expected to change over the long term. A drop in oil prices driven by weakening demand in the United States and China could lead to further reductions in investment, particularly in higher-cost production areas such as US shale gas. This, in turn, could affect future supply dynamics.

To quantify the potential impact, a 2-3% drop in oil demand from both the United States and China could reduce global demand by about 1.1 to 1.7 million barrels per day. Such a drop in demand could lead to a sharp drop in oil prices, possibly in the range of $10 to $20 per barrel, depending on how quickly and effectively supply adjusts to the reduced demand.

While the fall in crude oil prices will be positive for India, Morgan Stanley said the impact could be negative depending on the extent to which prices fall as it would only reinforce fears of a slowdown in the two largest economies. Do you agree with this view?
For India, lower crude oil prices are generally beneficial, particularly as they reduce import bills and help control inflation, but there are broader global implications that could offset these advantages. If crude oil prices fall sharply, it is usually a sign of weakening demand, which can be a sign of economic slowdown in major economies such as the United States and China. Since these two countries play a crucial role in driving global economic growth, a slowdown in these countries would negatively affect global trade and economic sentiment.

As India is closely linked to global economic conditions, a significant slowdown in the US and China could lead to lower demand for Indian exports, reduced foreign investments and a general tightening of global financial conditions. Therefore, while cheaper crude is beneficial in itself, the broader economic environment and its impact on global growth must be considered. If the price decline is due to supply-side factors such as geopolitical stabilisation or increased production, it is more favourable for India. However, if it is due to demand-side weakness in major economies, the net impact could actually be negative.

What should traders/investors do with crude oil?
Upside selling is expected up to Rs 5,050 levels. Upside resistance would be around Rs 6,000 and significant rallies could be leveraged to sell crude oil.

Read also: Crude oil prices are down 26% from their peak. Which are the best stocks to buy?

(Disclaimer: The recommendations, suggestions, views and opinions of the experts are their own and do not represent the views of Economic Times)