Crude oil’s outlook weak, WTI price likely to soon hit $59 level
The crude oil market is closely watching the development of the China-US trade talks.
Commodity Summary MCX
Trump threatened to rise on $200 billion worth of Chinese goods from 10 per cent to 25 per cent. Brent ended the week at $70.71 per barrel and braced its first weekly loss after five straight weeks of gains in a row, while the WTI crude future had winded down the week at $61.83 per barrel, posting its second straight weekly decline.
To add to the pressure, rising US stockpiles and an easing of supply concerns were two factors that drove crude lower last week.
The other factor was speculation that Saudi Arabia and its allies would increase output to make up any shortfall from the expanded sanctions against Iran and worries that Russia would end its participation in the plan to trim global supplies, outweighed any potentially bullish news.
EIA inventory report showed that US crude inventories rose by 9.9 million barrels for the week-ended April 26. The EIA data also showed that gasoline inventories edged up by 900,000 barrels, while distillate stockpiles fell by 1.3 million barrels last week against a draw of 1 million barrels for gasoline and 1.2 million barrels for distillates. US refinery inputs averaged 16.4 million bpd for the week ended April 26, about 137,000 less than the previous week’s average.
Refineries operated at 89.2 per cent of capacity. The drop in refining activity and the rise in imports was the main reason for the surge in crude inventories. The US crude oil production breached a record output of 12.3 million barrels per day last week, posting a rise of about 2 million barrels per day over the recent past. On the other hand, data from US energy services showed the number of active oil and gas rigs fell slightly in the United States this week according to Baker Hughes, after two large drops in the two previous weeks, keeping the overall rig count well below year-ago levels for a third week in a row.
The total number of active oil and gas drilling rigs in the US fell by one, with the number of active oil rigs gaining two to reach 807 and the number of gas rigs falling by three to reach 183.
Oil prices came under pressure on reports that Saudi Arabia could edge higher in June to meet domestic demand for power generation, though output will remain within its quota in the supply pact where Saudi is expected to produce about 10 million bpd in May, slightly higher than in April but still below its 10.3 million bpd quota under the Opec-led deal.
For Russia, prices can get some support after Russia reported that it is being forced to cut its oil production after buyers in Europe discovered that $2.7 billion worth of oil they had purchased from a Russian producer was contaminated, Russia announced that it will be cutting production by about 1 mbpd for 5 days — about 10 per cent of its total oil production. But if Russia manages to clean oil through the Druzhba pipeline towards western Europe again, we can see prices back to bearish zone. On the other hand, Hungary, Poland, and the Czech Republic are releasing a total of eight million barrels from their respective strategic petroleum reserves to keep refineries operating after contaminated crude forced the shutdown of the Druzhba pipeline carrying oil from Russia to customers in Europe.
Earlier this week, the International Energy Agency (IEA) said that Poland had tapped its emergency crude oil stockpiles in order to keep key refineries operating. The energy ministry of Poland decided to release 500,000 tonnes of oil from its strategic stocks on April 26, and another 300,000 tonnes on April 30.
Prices stayed positive despite forecast calling for milder temperatures into mid-May and expectations of several more triple-digit storage builds before the summer cooling season begins. Spot gas prices retreated as current weather conditions reduced demand for product. The midday weather data continued to favour a stronger cool shot across the central and northern United States for late in the week ahead, adding back demand compared to inventory data.
Overall, the weather pattern over the next couple of weeks will be mild with fairly weak demand nationally. This will continue to support strong, bearish, triple digit injections in the weeks ahead. The EIA reported a 123 Bcf injection into US gas stocks for the week ended April 26, topping consensus estimates.
Prices action clearly states that market is expecting Saudi and Russia to bridge gap due to shortfall from Iran sanctions and other allies joining them to provide adequate supply of crude to markets.
In the coming week, the market is watching closely the development of the China-US trade talks. Traders are now starting to focus on whether Saudi Arabia will decide to help make up for any oil lost from the market from the US move on Iranian waivers to the 8 buyers (including China, India, Japan and South Korea), or move to extend a production-cap deal with major producers – including Russia that’s due to expire at the end of June. For the week, we expect the negative bias to continue and WTI prices touching levels $59 soon.