Crude oil to fall below $51 soon as rising prices fuel spurt in US shale output
By Prathamesh Mallya
In the past fortnight, WTI and Brent crude prices declined around 0.26 per cent and 1.33 per cent, respectively, while prices declined by around 1.36 per cent on the MCX in the same period.
Crude oil has been trading in a very tight band for most of February, as markets remain indecisive about the supply as well as demand side dynamics with regards to compliance of Opec nations to cut oil output vis-a-vis US shale producers raising output and taking the benefit of the rise in oil prices in recent months.
Oil prices, while supported by supply cuts by members of the Organisation of the Petroleum Exporting Countries (Opec) since the start of the year and a spike in tension between Iran and the United States, are struggling for direction.
The Trump administration's new sanctions against Iran is not affecting oil output, but it has raised concerns about the potential for further developments that could hinder export growth in Opec’s third largest producer.
On the other hand, the US Energy Information Administration said last week that US crude inventories have risen sharply for four straight weeks, while the number of US oil drilling rigs rose to the highest level since October 2015.
Beyond rising drilling activity, there are concerns that US gasoline consumption, a key pillar for crude oil demand, is stalling. Also, gasoline stock rose by almost 21 million barrels in the first 27 days of 2017, compared with an average increase of less than 12 million barrels at the same time of year during the previous decade, according to EIA inventory data, implying either stalling demand or ongoing oversupply.
According to reports, China’s crude oil import demand would soften during the first half of the year on account of refinery maintenance that results in less demand. Besides, independent refiners were given a lower annual crude import quota, which would further imply less consumption.
In totality, the efforts by the Opec nations to cut output and bring back stability in oil prices is benefiting the shale producers in the US. While increasing rig count signals rising production from the US in the months ahead, sentiments are not good to bet on the long side in the oil market.
According to the CFTC positions, money managers and hedge funds were net longs on crude oil at around 421,926 contracts as on Feb 14, 2017. Weak sentiments on account of rising production and rig counts in the US will lead to a correction in oil prices. Besides, if net longs which are at record highs get liquidated, sharp fall can be expected in oil prices.
We expect oil prices in the international markets (CMP: $53.5/bbl) to fall below $51 a barrel in the coming fortnight, while MCX oil prices (CMP: Rs 3,625/bbl) can move lower towards Rs 3,500 a barrel level in the same time frame
(Prathamesh Mallya is Chief Analyst for Non Agri-Commodities & Currencies at Angel Broking. Views expressed in this writeup are his own and do not reflect those of ETMarkets.com. This article is only for reference purposes)
In the past fortnight, WTI and Brent crude prices declined around 0.26 per cent and 1.33 per cent, respectively, while prices declined by around 1.36 per cent on the MCX in the same period.
Crude oil has been trading in a very tight band for most of February, as markets remain indecisive about the supply as well as demand side dynamics with regards to compliance of Opec nations to cut oil output vis-a-vis US shale producers raising output and taking the benefit of the rise in oil prices in recent months.
Oil prices, while supported by supply cuts by members of the Organisation of the Petroleum Exporting Countries (Opec) since the start of the year and a spike in tension between Iran and the United States, are struggling for direction.
The Trump administration's new sanctions against Iran is not affecting oil output, but it has raised concerns about the potential for further developments that could hinder export growth in Opec’s third largest producer.
On the other hand, the US Energy Information Administration said last week that US crude inventories have risen sharply for four straight weeks, while the number of US oil drilling rigs rose to the highest level since October 2015.
Beyond rising drilling activity, there are concerns that US gasoline consumption, a key pillar for crude oil demand, is stalling. Also, gasoline stock rose by almost 21 million barrels in the first 27 days of 2017, compared with an average increase of less than 12 million barrels at the same time of year during the previous decade, according to EIA inventory data, implying either stalling demand or ongoing oversupply.
According to reports, China’s crude oil import demand would soften during the first half of the year on account of refinery maintenance that results in less demand. Besides, independent refiners were given a lower annual crude import quota, which would further imply less consumption.
In totality, the efforts by the Opec nations to cut output and bring back stability in oil prices is benefiting the shale producers in the US. While increasing rig count signals rising production from the US in the months ahead, sentiments are not good to bet on the long side in the oil market.
According to the CFTC positions, money managers and hedge funds were net longs on crude oil at around 421,926 contracts as on Feb 14, 2017. Weak sentiments on account of rising production and rig counts in the US will lead to a correction in oil prices. Besides, if net longs which are at record highs get liquidated, sharp fall can be expected in oil prices.
We expect oil prices in the international markets (CMP: $53.5/bbl) to fall below $51 a barrel in the coming fortnight, while MCX oil prices (CMP: Rs 3,625/bbl) can move lower towards Rs 3,500 a barrel level in the same time frame
(Prathamesh Mallya is Chief Analyst for Non Agri-Commodities & Currencies at Angel Broking. Views expressed in this writeup are his own and do not reflect those of ETMarkets.com. This article is only for reference purposes)
