Crude oil prices likely to turn choppier; use any rally to sell

By Navneet Damani

Crude oil prices settled at their lowest in two weeks. Escalating US-China trade tensions, worries over increasing US production levels and ongoing efforts by major global crude producers to reduce supply glut will likely be the main drivers of sentiment in the week ahead.

Then, there is news that Bahrain has discovered shale oil reserve estimated to contain more than 80 billion barrels, making the once-marginal oil producer a potential major player. This has cast doubt on demand deficit euphoria that crude producers are banking on.

Mood turned negative after Baker Hughes reported a 10-rig increase last week. The total number of oil and gas rigs now stands at 1,003, an addition of 164 year on year. The number of oil rigs in the United States went up by 11 last week, for a total of 808 active oil ones.

Oil prices moved down in the previous week, driven by geopolitical worries and speculation that Russia might opt out of the OPEC deal that will put pressure on crude oil prices.

Another factor fuelling concern is souring US oil output and increasing US exports. The US is exporting crude oil at a record pace, with no signs of slowing down, which has the potential to unbalance a global oil market in the case of recovery. American crude oil exports rose to 2.175 million bpd, or more than 15 million a week, at the end of March.

That marked its highest level on record.

The Permian basin crude oil production reaching an all-time high is adding to fears. US production is estimated to have hit a record 3.08 million bpd in March, nearly a third of overall US output of 10.4 million bpd.

The next boost will be expansion of Permian Express, which will add 200 million barrels of daily capacity in late 2018. Meanwhile, trade war fears between China and US kept crude oil prices under strain. The trade dispute escalated after Trump threatened $ 100 billion more in China tariffs.

US crude oil inventories dropped for the week to March 30, and the refining sector input at 141,000 barrels per day is more than the previous week’s average, stated the US EIA. US commercial crude oil inventories, excluding those in the Strategic Petroleum Reserve, for the week came down by 4.6 million barrels from the previous week. At 425.3 million barrels, US crude oil inventories are in the lower half of the average range for this time of the year.

Total products supplied over the past four weeks averaged over 20.9 million barrels per day, up 7% from the same period last year. Distillate fuel product supplied averaged 4 million bpd over the last four weeks, down 4.4% from the same period last year. Jet fuel product supplied is up 3.7 per cent compared to the same four-week period last year.

The trade spat between China and the US escalated and has led to huge volatility in markets. China has slapped extra tariffs of up to 25% on 128 US products including frozen pork as well as on wine and certain fruits and nuts in response to US duties on imports of aluminum and steel. Trump has threatened $ 100 billion more in China tariffs, which led to investors shifting their focus away from risky assets if things worsen from here on.

For most of 2018, the front-month WTI contract has remained in a state of backwardation. We expect this choppiness to continue in the oil markets for some more time. The factor that could move the market in bearish mode is if the ongoing negotiations between the US and China end without a compromise. Then, President Trump is likely to follow-through on his threat to impose sanctions on China. This could be potentially bearish for crude oil. If there is a compromise and stocks rally, then look for crude to be underpinned.

Meanwhile, bullish news of Venezuela’s reduction in crude output to 1.38 million bpd by the end of 2018 boosted sentiment. The main impact of this reduction will be seen in decline to exports of crude to US and would translate into more crude storage declines and increase its deficit.

Henceforth, the market will largely be focusing on production and inventory data, with prices in the midst of a bull bear territory. We expect that there is going to be a see-saw trend with no major directional clarity. Meanwhile, investors are tracking a monthly report by the OPEC and the IEA for further clues.

We are nearing a critical point as geopolitical tensions and tight balances will support crude prices. However, the size of any correction will be determined by seasonal factors. In the short term, we expect crude to remain choppy and selling on rise is advised. Meanwhile, any comments from global oil producers for additional signals on whether they plan to extend their current production cut agreement into the next year will remain the key. Technically, short-term bias looks weak and rallies could be used as opportunities to sell.

Domestic crude oil faces resistance at Rs 4,095 and Rs 4,165 while supports on the downside are towards Rs 3,990 and Rs 3,900 zone.

(Navneet Damani is AVP Research at Motilal Oswal Commodities. Views expressed in this article are author’s own and do not represent those of ETMarkets.com)