Crude Oil Prices Jump As US Stockpiles Fall Amid Geopolitical Risks Mount

Crude oil markets have exhibited significant price volatility recently, with a notable recovery from recent lows driven by a combination of factors. One major catalyst has been the decline in U.S. crude oil inventories, which fell by 1.4 million barrels last week, surpassing expectations of a 1.0 million barrel decrease, according to the U.S. Energy Information Administration (EIA).

This decline has provided support for crude oil prices, helping them rebound from their recent lows.

Additionally, ongoing geopolitical tensions in the Middle East have contributed to the recovery in crude oil prices.

However, gains have been tempered by factors such as the strengthening of the dollar index and diminishing hopes of Federal Reserve rate cuts.

Despite these headwinds, crude oil prices have managed to recover sharply from their three-month low levels.

"Given the problems associated with imputing the per barrel costs from different sources (owing to different densities across crude varieties), we have looked at the imputed unit value of such imports in $/tonne. Interestingly, the imputed unit value for imports from Russia (on an annual basis) was 16.4% and 15.6% lower than the corresponding levels from West Asia during FY2023 and 11M FY2024, respectively, which contrasts with the trends observed during FY2019-21, when the former had exceeded the latter, providing an estimate of the discounts on imports from Russia in the last two fiscals" ICRA said in report.

WTI crude, for instance, bounced back from lows of $76.91 to settle up by 0.8% at $78.99 a barrel.

The recent correction in prices can be attributed in part to hopes of a ceasefire in Gaza, which have exerted downward pressure on oil prices in recent trading sessions and diminished risk premiums.

In terms of inventory data, U.S. weekly crude inventories fell to 459.5 million barrels last week, while refinery utilisation rates rose to 88.5% of total capacity. Despite this increase, utilisation rates remain lower compared to a year ago.

Moreover, gasoline demand has shown signs of weakness, indicating subdued activity at gas stations. Distillates also experienced a buildup, further influencing market dynamics.

"This is estimated to have led to savings amounting to $5.1 billion in India's oil import bill in FY2023 (0.15% of GDP), amounting to 3.1% of India's crude petroleum imports during that fiscal," ICRA reports. Accordingly, if the average crude oil price rises to $95/bbl in FY2025, then the CAD is likely to widen to 1.5% of GDP from our current estimate of 1.2% of GDP. However, this would still be lower than the levels seen in FY2023 (2.0% of GDP), as tepid demand may keep a lid on the prices of other commodities," ICRA added in the report.

Looking ahead, the Energy Information Agency (EIA) has revised its outlook for global oil and liquid fuel demand, projecting a growth of 920,000 barrels per day (bpd) this year to 102.84 million bpd. Total world crude oil and liquid fuel production is expected to rise by 970,000 bpd to 102.76 million bpd in 2024.

The United States is anticipated to maintain its position as the leading crude oil producer, with production levels hovering around 13.20 million bpd.

In the context of India, crude oil consumption has shown a year-on-year increase, reaching 19.86 million tonnes, or 4.85 million barrels per day, in April 2024.

However, there was a month-on-month decline of 5.8%, with fuel oil usage dropping by more than 16% compared to April 2023. Despite these fluctuations, India's economic growth is expected to remain robust at 6.5% in 2024, positioning it as one of the fastest-growing economies globally.

Looking forward, crude oil markets are likely to experience continued volatility. While prices have corrected by around 10% over the past five weeks, prompting some U.S. drillers to consider scaling back production in shale basins, geopolitical risks persist.

Uncertainties surrounding the Gaza-Israel conflict and the potential for escalation in Rafah could further influence market sentiment.

From a technical perspective, crude oil's 100-day moving average currently sits at $78.22, with prices settling above this level on Wednesday.

The next key target is the 200-day moving average at $80.06. Overall, crude oil prices are expected to trade with an upward bias in the range of $77 to $80 per barrel, with the possibility of WTI crude testing the $80-mark in the near term.

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