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Rude Drivers of Crude Oil Price

It has been almost five months that Crude oil prices have been in a price band of $76-82/bbl. During this time there have been some issues on the supply side and a few on the demand side. This resulted in the crude oil volatility index OVX falling from a high of 39 to 31 but still higher than the previous low. The important question is whether we move towards the low or high.

Some important factors are driving the trend from hereon. As mentioned previously one of the risks is the conflict in the Red Sea dragging longer and it has been getting more complicated with time. This has resulted in a high spread between the physical and market price of crude oil. And the risk it creates is for the market prices to move up.

From the production end, OPEC+ announced that it would continue its voluntary cuts till June’24 without giving any direction on the road beyond. This might have a tightening impact as the global economy continues to grow.

Even the asset managers that have been negatively positioned as they estimated the crude oil prices to fall are now reducing their net shorts. In the last two months, net shorts have reduced by 25%.

The immediate focus remains on the Israel-Hamas ceasefire talks that are ongoing sometimes getting closer to being done but sometimes far from being done. If by the start of Ramadan that is 10th March nothing comes through then it would push the conflict into a difficult phase and result in oil prices spiking. Even if there is a ceasefire it might only help delay the risks impact.

Given all those factors the majority of risk is towards the upside and as we get closer to Q2 it might get to impact the prices quickly. The problem might then spread to inflation and the estimated rate trajectory then onwards.


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