Prices of Brent crude recovered from a record 6 percent fall on Tuesday, getting support from an unexpected decline in US weekly inventory and a rise in Indian oil imports.
But the current recovery in oil prices looks temporary and prices will fall more in coming weeks. There are a number of factors that are driving crude oil prices in the international market and we have to analyse both sides of the coin.
Looking at the production side, global oil production reached a record level as US crude oil production jumped by almost a quarter this year to a record 11.7 million barrels per day, largely because of a surge in shale output.
Production by Saudi Arabia and Russia has also witnessed an increase this year. Recently, US exempted eight countries from its sanctions on importing crude from Iran. These included India and China - the two biggest oil-consuming countries.
The supply from Venezuela and Libya has also been restored. Looking at the supply side, global supply seems to be higher than the consumption.
This has led to OPEC countries planning a cut in production by 1.4 million barrels per day from next month. Secondly, India's oil import reached the highest recorded level of 5 million barrels per day. These two are key factors supporting prices at the moment.
Markets are also eyeing the forthcoming OPEC meet on December 6 at Vienna, which will help them take a consensus on oil production cuts.
Looking at the comfortable supply situation, higher US oil production, concern on global consumption growth (down to 1 percent from 1.3 percent earlier), Brexit deal and Italy budget issues, we expect crude oil prices to remain under pressure in the coming weeks.
Last but not least, the risk premium of Brent crude will also narrow as compared to WTI in the coming weeks as possible geopolitical tensions ease off and could also affect the risk premium of Brent adversely.
Any 'dead cat' bounce in the prices toward $66-67 will be a great opportunity to go short again in Brent for a possible downside target of $60-58.
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