Price action suggests a major rally is likely in crude oil prices
Prices are expected to rise on account of geopolitical risks that is rocking oil market.
Commodity Summary MCX
WTI and Brent were set for weekly loss after US escalated its tariff war with China by increasing levies to 25 per cent for $200 billion worth of Chinese goods. The growing tensions between the two has increased fears of slowdown in global demand as US and China together accounted for 34 per cent of global oil consumption in the first quarter of 2019.
While the higher tariffs would surely lead to some dampening effect on the Chinese economy, uncertainty over what will happen to the global trade with escalating clash between the world’s top two economies had a greater impact on oil traders. China promised to retaliate telling the Trump administration to brace for reciprocal moves.
On the other hand, the continuous production cuts from Opec and sanctions on Iran and Venezuela provided support to prices. Data showed that Opec’s output inched up by a modest 30,000 bpd to 30.26 million bpd last month. The production declined in Iran as a result of US sanctions, as did output in Angola, which is struggling to boost investment in its oil and gas industry. Among the risers in the oil cartel were Nigeria, Iraq, and Libya. Surprisingly, even production in Venezuela stabilized last month.
The other factor was speculation that Saudi Arabia and its allies would increase output to make up any shortfalls 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. Saudi Arabia kept its production rate stable in April at an average 9.82 million bpd. Reports from earlier this month had it that Kingdom planned to increase its oil production in June but not exports as local demand would soak up the additional output without it affecting international prices.
On the other hand, contamination in Russia's Druzhba oil pipeline, a key conduit for crude into Eastern Europe and Germany, has hit Russian exports as well, further putting a floor under crude markets.
The contaminated oil was being shipped via the Druzhba pipeline, which boasts an impressive 1 million barrels per day capacity, or 1 per cent of total global crude demand and as a result of the crisis European purchases of oil fell by up to 10 per cent, roughly 1 Mbpd.
Meanwhile, now that we are approaching the date for the revision of the pact - June 25-26 - Russia is sending mixed signals once again about its commitment to the deal, again.
Meanwhile, short-term outlook report from EIA raised its forecasts for oil prices and US crude-oil production. The EIA forecasts 2019 US crude production of 12.45 Mbpd, up 0.5 per cent from the April forecast. It also raised its 2020 output view by 2.2 per cent to 13.38 Mbpd. For 2019, the EIA lifted its WTI crude price outlook by 6.8 per cent to $62.79 a barrel and its Brent view by 6.9 per cent to $69.64. It also raised the 2020 WTI price view by 8.6 per cent to $63 and Brent view by 8.1 per cent to $67.
EIA inventory report showed that US crude inventories saw a surprise drawdown of 4 mbpd compared to build of 1.1 mbpd. In gasoline inventories, there was a drawdown of 600,000 barrels for last week, after a 900,000-barrel increase two weeks ago. Production in the week to May 3 averaged 10.1 million bpd, versus 9.9 million bpd in the previous week. In distillate fuel, there was inventory drawdown of 200,000 barrels compared with decline of 1.3 million barrels a week earlier. Distillate fuel production last week averaged 5.1 million bpd, largely unchanged on the prior week.
US refinery inputs averaged 16.4 million b/d for the week ended May 3, about 41,000 b/d less than the previous week’s average. Refineries operated at 88.9 per cent of capacity. US crude oil imports averaged 6.7 million b/d, down by 721,000 b/d from the previous week.
Over the last 4 weeks, crude oil imports averaged 6.8 million b/d, 15.6 per cent less than the same period last year. Total motor gasoline imports averaged 1.1 million b/d.
Distillate fuel imports averaged 111,000 b/d. Baker Hughes reported that the number of active US rigs drilling for oil fell by 2 to 805 this week. That followed an increase of 2 oil rigs the previous week. The total active US rig count, meanwhile, also fell by 2 to 988, according to Baker Hughes.
Oil prices got huge support after the tension escalated in Middle East after US Maritime Administration reported that US commercial ships including oil tankers sailing through key Middle East waterways could be targeted by Iran in one of the threats to US interests posed by Tehran.
The US has sent an aircraft carrier and a bomber taskforce to the region, although it’s not clear whether the move is intended to ensure clear passage through the strait or to counter other unspecified threats by Iran’s Islamic Revolutionary Guard Corps.
Opec’s task in estimating global oil supply going forward has been made more difficult by mounting uncertainty over Russian oil Contamination, expectations of further production declines in Venezuela, and possibility of an outage in Libya, which is in the midst of a civil war with rival armies fighting for the capital Tripoli.
Prices stayed positive on account of reduction in production. EIA reported an above-average 85 Bcf weekly injection into US natural gas stocks, matching the 85 Bcf build recorded for the year-ago period but larger than the 72 Bcf five-year average. The short term weather outlook stated that demand is expected to remain low into next week. Futures were dragged higher despite the absence of early summer heat in the weather forecasts to drive demand.
Prices are expected to rise higher on account of Geopolitical risk that is rocking crude oil prices. The markets are close to summer driving season in US and Saudi and Russia has made no clarification for its intention to raise production. We can prices to touch $63 if there is any other trigger between the US and Iran, which could disrupt Middle East output and drive oil prices higher However the US –China trade war worries will keep pressure on prices.
The current price action suggests a major move is coming, but it’s not likely to happen until there is major breaking news regarding US–China trade relations. Broadly we can see WTI crude oil prices fluctuating between $60.50 and $63 levels.