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Inflation, interest rates hamper sentiment towards oil; WTI around Dollar 85

12 Nov , 2022   By : Monika Singh

Inflation, interest rates hamper sentiment towards oil; WTI around Dollar 85

Crude oil had been on a declining spree on demand destruction anticipation as China continued to adopt its strict Covid policy by lockdown. Concerns over sluggish Chinese demand were the biggest weights on crude prices this week, as local authorities dismissed speculation that the country plans to scale back its strict zero-Covid policy. There is also lingering concern over a global economic slowdown, due to rising inflation and interest rates which also hampered sentiment toward oil markets leaving WTI around $85. Hybrid work environment has also dented demand for crude as less people are transiting due to work from home.  

US CPI was the saving grace for crude, where oil rallied along with all asset classes when inflation came in softer than expected. The lower-than-expected inflation data instilled confidence in the markets, including the oil market, that the Fed may pivot from the aggressive interest rate hikes in recent months. A potentially slower pace of interest rate increases could reinvigorate economic growth and oil demand growth. However oil is not out of the woods; the WTI crude oil prompt spread, the difference between the current and next month’s contract prices fell to 0.80 on Thursday, down from 1.23 at the start of November. A falling prompt spread is generally seen as a bearish sign for prices.  

Bulls will come into play in the first quarter of 2023 as from December 5, oil embargo from Russia by Europe will take place. Any price cap will destablise the market and after the oil embargo, Russian production is expected to hit by 1 million bpd. The US will also stop selling from its strategic reserve and OPEC aren’t going to produce more than their quota. We now expect the combined effects of the OPEC cuts and EU embargo on Russian oil to be predominantly felt in 1Q23 rather than 4Q22.

In MCX, Nov Fut has support around 6900-6800 where previous swing low in Oct was made. Any breakout will come above $91.50 in WTI. Trend still is negative but we are not comfortable in shorting looking at risk/reward ratio since prices are near to its support zone. We would recommend to wait till price is in the range of 6900-6800 for long position with expected target of 7400-7500 and stoploss of 6600.

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