Crude oil may lose steam ahead, likely to hit $64 in the short term

By Navneet Damani

Oil prices turned choppy for much of the last week, before crashing by over 4 per cent on Friday. Reports suggest that the OPEC and Russia are planning to boost their production by as much as 1 million barrels a day as early as June to offset the shortfall in supply from Iran and Venezuela.

Renewed US sanctions on Iran that could seriously hamper the country’s oil exports, along with involuntary output decline in big producers such as Venezuela, Mexico and Angola, has contributed to some bounce in price.

Meanwhile, US drillers added 15 oil rigs last week, bringing the total count to 859, the highest since March 2015. Domestic oil production is at an all-time high of 10.7 million bpd, not far from Russia’s. Only Russia currently produces more, at around 11 million bpd.

The prices were on a roller coaster after data from EIA showed that US crude inventories rose 5.8 million barrels last week and gasoline stocks increased by 1.9 million barrels. Crude stocks at the Cushing, Oklahoma, and delivery hubs fell 1.12 million barrels. Refinery crude runs came off by 7,000 barrels per day.

Refinery utilisation rates hardened by 0.7 per cent. Gasoline stocks firmed up by 1.9 million barrels, against expectations of a 1.4 million barrel drop. Distillate stockpiles came down by 1 million barrels versus expectations of a 1.3 million barrel decline. Net US crude imports rose last week by 1.4 million bpd.

Meanwhile, supply issues surrounding Venezuela and Libya, and the possibility of disruption in Iran because of the sanctions propped up prices.

These geopolitical worries lingered. Add to that the news that Trump administration has proposed halving the strategic petroleum reserve (SPR), which will raise some $ 500 million during the fiscal year and $ 16.6 billion over the next 10 years.

Selling half the reserve over a full decade would have limited impact on world oil prices. The sale would amount to just 74,000 bpd, a modest amount of global consumption of 96 million barrels a day. But it would slow efforts by the OPEC to reduce global inventory levels, which are near record highs.

Meanwhile, Russia has signalled that it is phasing out historic supply curbs that eliminated a worldwide glut. Russia and other members of the OPEC are weighing the possibility of easing output limits at a time when American shale drillers are pumping record crude. This will be negative for crude oil prices.

For the OPEC, the next move will be to consider returning to a compliance ratio of 100 per cent of the agreed production cuts of 1.8 million barrels per day in 2016. The compliance with agreed cuts has reached 172 per cent and any reduction will translate into drop of 3.1 mb/d. Perhaps, the OPEC is taking US President Donald Trump’s Twitter attack at April-end seriously.

In one of such posts, he accused the OPEC of keeping oil prices artificially high and he would not accept price manipulation. The 2018 mid-term elections are just around the corner, and the President is keen to make sure high energy prices do not hurt the economy and complicate the political landscape. Towards this end, Saudi Arabia seems prepared to stop the oil price rally.

The concerns of US sanctions on Venezuela still remain as Trump issued an order prohibiting purchases of debt owed to Venezuela, including Petroleos de Venezuela. The move follows a first wave of restrictions last year that banned purchase of new debt from the government. Venezuelan crude output may go below 1 MMbpd in coming months, from 1.5 MMbbl in April.

Money managers are feeling less and less bullish. Hedge funds cut their net long positions for the fifth consecutive week, the longest stretch of declines since November 2016. The reductions came just before Brent crude oil surged above $ 80 per bbl this week for the first time since 2014.

For natural gas, it closed higher for the third consecutive week, underpinned by weather forecasts calling for hot temperatures and a lower than forecast storage build in last week’s government report. The EIA reported that natural gas in storage in the US increased by 91 Bcf in the week ended May 18 versus the expectation of 93 billion build-up.

Oil prices have grabbed all the attention and are on an upward trend with some intermediate corrections. They are set for the longest run of weekly gains in seven years as concern over supply disruptions from the Middle East to Venezuela grows and a global glut dissipates. Oil has a lot of good things going for it in these times and there is Iran story which continues to develop and the general talk about a tighter market.

OPEC and non-OPEC producers will meet in June to assess market conditions and likely discuss a tapering of production curtailments in order to maintain market balance now that global oil inventories have declined to the five-year average.

For the short term, we could see some stress on prices towards Rs 4,400 and Rs 4,320 on MCX and $ 64.70-64 on NYMEX. However, this could be just a retracement of the rally. On the upside, MCX crude faces resistance around Rs 4,560 and Rs 4,625 and at $ 67.30-68 on NYMEX, above which the market would once again start favouring the bulls.

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