'Crude trend hints buy on dips, prices can still go higher from here'

Crude oil prices further supported by a much higher-than-expected crude inventory draw.

February 23, 2021 / 11:01 AM IST
Source: Reuters

Source: Reuters

Crude oil prices experienced huge volatility last week with prices of WTI breaking the levels of $62 a barrel and then plunging by 2 percent by the end of the week - the lowest level in a week as the whole euphoria of output disruption by heavy freezing in Texas got ebbed and output slowly resumed in Texas.

Traders weighed the return of US crude production that was hit by freezing temperatures across Texas last week, against weaker refinery demand as plants impacted by related power outages resumed operations. Reports suggest that approximately 7,00,000 bpd in February production of US Lower-48 onshore crude, seeing a quick output rebound on expectations of warmer weather this weekend.

Prices got further support on a much higher-than-expected crude inventory draw but these higher prices are leading to worries about potential output increases by the cartel, putting some downward weight on prices. Meanwhile, Brent’s nearest time spread remains at one-year highs in a structure indicating tighter supplies and WTI’s discount to Brent has widened further past $3 a barrel this week, as replacements are sought for US crude exports.

Saudi Arabia and Russia are once again heading into an OPEC+ meet on March 4 and reports suggest that they are on a different path about the decision for production cuts. Saudi is providing comfort to markets and publicly urging fellow members to be extremely cautious, despite prices rebounding to a one-year high. Russia, on the other hand, is indicating its need to increase production for its economy as higher prices are the best case scenario for Russia to earn revenue in this pandemic. Iran meanwhile will also start restricting snap inspections of its nuclear sites this week and is calling on the US to end sanctions if it wants talks, adding further pressure to the prices.

Markets are typically keeping an eye on the two most important decisions:

Close

First, the group as a whole must choose whether to restore as much as 5,00,000 bpd, the next step in a gradual revival of production that was agreed on in December but paused at the January meeting.

Second, Saudi Arabia must determine the fate of the extra 1 million barrels per day of extra voluntary cuts, the new year gift to oil markets and step to clear surplus inventories even more quickly.

Inventory

Crude prices got support as EIA data showed a drawdown US crude stockpiles tumbled more than 7 million barrels (MB) last week to the lowest in almost a year. The data also showed supplies at the nation’s largest storage hub at Cushing, Oklahoma, fell by the most in a month, while crude output ticked lower. The EIA report also showed a build of 0.7 million barrels in gasoline stocks, whereas distillate inventories dropped by 3.4 MB. Given the refinery outages, crude input to refiners will likely suffer, and so in the weeks ahead, we could see some fairly large crude oil stock builds. For rigs, US energy firms this week cut the number of oil rigs operating for the first time since November as blistering cold and snow hit most of Texas, New Mexico and other big energy-producing areas.

Outlook

Crude trend is looking like buying on dips and prices can still go higher from here, with Saudi Arabia's production cut, inventories are drawing and vaccines promising a return towards normalcy at the end of the day, making some progress toward the end of the tunnel, there's still some room for this market to go. Meanwhile, pandemic continues to crimp fuel consumption from China to the US, with IEA cutting its demand forecast for 2021 and describing the market as fragile.

The big event for markets in the week ahead is testimony from Federal Reserve Chairman Jerome Powell, who speaks before Congress on the state of the economy Tuesday and Wednesday. The forecast suggests Fed's will continue easy policy, support more fiscal stimulus but perhaps sound more positive on the economy. The markets will be especially watching for any comments on inflation or rising interest rates, after the benchmark 10-year Treasury yield continued its rapid climb, hitting a fresh 1-year high of 1.36 percent in the past week.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Navneet Damani is the VP – Commodity Research at Motilal Oswal Financial Services.
first published: Feb 23, 2021 11:01 am

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