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crude oil

Crude oil sell-off a bit overdone 

Following a spike to near $123 per barrel last week due to a variety of global factors, crude oil prices fell by as much as 6%, or $11 to $112 per barrel, on June 17. This was a sharp reversal from the steep ascent that followed Russia’s invasion of Ukraine, with global travel opening up and services reviving. 

The correction was primarily caused by two factors: new figures for Libyan oil being confirmed at 700,000 barrels per day (bpd) rather than the previously expected 100,000 bpd, and US market turmoil caused by a sell-off in broader risk assets.

The Libyan oil minister confirmed this as well, and while the number is still below the 1.1-1.2 million bpd that Libya is capable of producing, compared to the 100,000 bpd production that the market had assumed, this was somewhat bearish news.” 

Not only in the United States, but globally, demand is still strong. There is still some momentum there from pent-up demand.”

However, in the midst of the COVID-19 pandemic, the bulk of demand has shifted from products to services such as travel, leisure, hospitality, and industries, among others. 

It is also the peak season for travel in the Western Hemisphere, with people returning to the roads and skies in droves. There is some momentum, but suppliers remain in the driver’s seat. 

The sell-off on Friday was “a little overdone,” and prices could soon be “ticking back up again.” 

Since the Ukraine war, crude prices have remained in the $100-120 per barrel range and are expected to remain there. 

As long as Western sanctions against Russia remain in place, there is no reason to expect crude oil prices to fall below $100 per barrel in the near term. 

The immediate concern for the “here and now” is supply. So, $100-120 heading into the next quarter, with an average of around $110/barrel is expected. 

On June 20, oil prices fell slightly, reversing earlier gains, as concerns about slowing global economic growth and fuel demand outweighed concerns about tightening supplies. Brent crude futures were down 3 cents at $113.09 per barrel at 0515 GMT, after rising as much as 1% earlier. Front-month prices fell 7.3 percent last week, the first weekly drop in five weeks.

Meanwhile, WTI crude was trading at $109.42 per barrel, down 14 cents, or 0.1 percent, after rising more than $1 earlier. Last week, front-month prices fell 9.2 percent, the first drop in eight weeks. 

On June 20, shares of Oil and Natural Gas Corporation (ONGC) and Oil India fell, mirroring the sharp drop in global crude oil prices. 

Rising oil prices have been one of the driving forces behind ONGC and Oil India’s outperformance in 2022 thus far. While Oil India shares are still up 18% this year, ONGC is down 5.5 percent following the recent correction.

Concerns about these stocks are heightened by the possibility of imposing a windfall tax on their earnings to compensate the government for the loss incurred by excise duty cuts. 

Brokers are still optimistic that crude oil prices will remain above $100 per barrel for the rest of 2022-23, boosting ONGC and Oil India’s earnings. Furthermore, domestic natural gas prices are expected to rise sharply at the September review, potentially increasing earnings for ONGC and Oil India.

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