Crude oil's sharp gains last week are not justified given concerns about the Chinese economy and the slowdown in manufacturing activity, according to Ravindra Rao of Kotak Securities.
Reflecting the general trend in commodities, crude oil bounced back last week after initial weakness, logging a weekly gain of three percent. Crude oil's sharp gain last week is not justified given concerns about the Chinese economy and the slowdown in manufacturing activity.
Last week, crude oil tested the highest level since mid-July. It largely reflected the trend in the US and Chinese equity markets as market players assessed the Federal Reserve’s monetary policy and China’s economic health. Equities came under pressure amid worries that the US central bank may give a clear timeline for tapering of its bond purchases. Worries about a possible default by China’s debt laden Evergrande Group also dented market sentiment.
Risk appetite improved as China’s central bank infused liquidity and took efforts to avoid a default by the Evergrande Group, and as market players took the Fed's rate hike projections in stride and focused more on hopes of continued economic growth in the US.
Crude oil saw some buying interest as market concerns rose about rising gas and coal prices in Europe and Asia. It also benefitted from a rise in Indian imports amid signs of a pickup in demand.
India's crude imports rose to a three-month peak in August, rebounding from a nearly one-year low in the previous month. A bigger-than-expected decline in US crude oil stocks and a slow restart of production in the Gulf of Mexico also lent support.
US crude stocks fell for the seventh consecutive week to the lowest level since October 2018. US crude production shut in the Gulf of Mexico due to Hurricane Ida has recovered slowly. As of September 23, 16.18 percent of crude production in the Gulf of Mexico remained shut.
However, weighing on the price was China’s auction of crude stocks from state reserves, a slowdown in manufacturing activity globally and a rise in US crude oil to the highest level since April 2020.
Manufacturing PMI data from the US and Europe last week showed a slowdown in activity. US crude oil rig count rose for a third straight week to 421 rigs -- the highest since April 2020, as higher prices improved production interest.
Also weighing on price was Iran’s willingness to work in the nuclear deal which may pave way for more exports. Iran said it would return to talks on resuming compliance with the 2015 Iran nuclear deal "very soon", but gave no specific date.
What to expect this week
We may see some volatility this week also as market players position themselves for the upcoming meeting of the Organization of the Petroleum Exporting Countries (OPEC), scheduled on October 4.
-- Ravindra Rao, CMT, EPAT, is VP-Head Commodity Research at Kotak Securities. Views are his own.