Rally likely in oil prices but upside may be capped on uncertain demand outlook

We expect Nymex Crude prices to face stiff resistance around $40-$42 per barrel. We expect prices to average near $28 per barrel during the year.

Sakina Mandsaurwala

Commodity prices are exhibiting interesting trends recently, while gold prices are trending soft, base metals and crude are showing strength. Comex Gold prices fell by 1 percent while silver prices rallied 3.6 percent during the last week. Gradual opening up of China and stimulus announced across the globe is triggering some hope for base metal prices.

China's annual meeting announcement where in budget deficit is raised from 2.5 percent to 3.6 percent in 2020 implies infrastructure investment likely to be announced.

Crude oil prices are on the rise after extreme reactions in the market on the last expiry date when the prices had fallen into the negative territory. Prices are being supportive from the fall in oil rig counts suggesting the slowdown in investment in US Shale companies. A lot of reversal in prices is seen due to supply demand factors as the economies removes restriction domestically and forced and planned supply cutbacks from US and OPEC+ nations.

In its May outlook, EIA forecasts that US crude oil production will average 11.7 million barrels per day (mbpd) in 2020 and 10.9 mbpd in 2021 which is lower by 0.5 and 1.3 mbpd respectively. OPEC forecasted a worst demand contraction in Q2 2020 by 9.07 mbpd however on the supply side, non-OPEC supply in 2020 is expected to see a deep contraction of 3.5 mbpd mainly in the US, Russia and Canada and OPEC production cut of 9.7 mbpd until June.

At present, the easing restrictions, reversal in supply and demand and fall in shale oil production are the reasons behind the oil price rally. Going forward, we believe swift rally in oil prices may collapse the OPEC deal and also bring back shale oil production in the market while the demand outlook remains uncertain. Therefore, we expect Nymex Crude prices to face stiff resistance around $40-$42 per barrel. We expect prices to average near $28 per barrel during the year. Currently, the Nymex Crude prices are trading at $33.4 per barrel.

The author is Commodity Analyst at Narnolia Financial Advisors.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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