Trade Synopsis: Short Brent futures
Trade Recommendation: Short Brent Future (CMP 71.8), TP 49.85 & SL 82.85.
Introduction: We believe that weakening global demand, increasing supply, a stronger dollar & lack of geopolitical risk triggers can lead to Brent testing 50 levels by June’25.
We believe the biggest issue with crude demand globally is China. Between 2000 and 2023, China accounted for 50 percent of the growth in world oil demand, averaging an annual increase of 518,000 barrels per day (bpd). For CY24, this no is now 180,000 bpd, less than 10% of the the growth in world oil demand. There are both cyclical and structural factors, with the latter already starting to weigh on consumption. China’s oil demand is growing more slowly because of rising sales of new energy vehicles (NEVs)—a category that includes battery electric vehicles, plug-in hybrid electric vehicles, and fuel cell electric vehicles—China’s high-speed rail (HSR) network, and a property sector slump. The Chinese stimulus measures are unlikely to provide a strong boost to oil demand because their purpose is to steady the economy and achieve this year’s growth target of around 5 percent rather than stimulate rapid economic growth.
While demand growth cools, supplies from producers such as the US, Brazil, Canada and Guyana is set to grow this year and next by 1.5 million barrels a day. As a result, world supplies will exceed demand in CY25 by more than 1 million barrels a day, even if the 23-nation OPEC+ cartel abandons plans to restore output. If the OPEC group goes ahead with the planned output increase, the market surplus could nearly double from current levels to reaching as much as 1.6 MBPD. This does not bode well for crude prices.
Further fueling the bearish outlook is the incoming administration of U.S. President-elect Donald Trump. His focus on tariffs might lead to lower global growth leading to lower global demand for crude. Trump’s policy of “drill baby drill” also might lead to more US shale supply leading to further demand supply mismatch. Crude markets are extremely forward looking & in absence of geopolitical risk premium, we believe it is a matter of time before we break 70 levels on Brent & head towards 60 and finally 50 levels. Time frame for this trade is between 6-12 months.
Risks to the view: If OPEC decides to prolong the return of supplies to oil markets or there is a middle east geopolitical event risk or if China announces a new fiscal package targeting consumption.
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