Last Updated : Oct 14, 2018 09:59 AM IST | Source:

Demand-supply balance may keep crude oil range-bound in the short term

The outlook for crude oil is mixed. Both the IEA and OPEC have cut demand growth projections for 2018 and 2019, citing the escalating trade war between the US and China

Moneycontrol Contributor @moneycontrolcom

Ravindra Rao

Crude oil prices declined sharply last week as the IEA (International Energy Agency) appealed to OPEC (Organisation of Petroleum Exporting Countries) to boost production as high prices are hurting the global economy.

Earlier, there were fears that Hurricane Michael might lead to a shutdown of nearly 40 percent of Gulf of Mexico crude output. Later on, though, it emerged that the hurricane would not have any impact on crude oil production.

Both the EIA (Energy Information Administration) and API (American Petroleum Institute) reported a huge build-up in crude oil inventories, keeping crude prices under pressure. Losses were extended after OPEC production rose in September.

OPEC’s latest monthly report shows production in September rose by 132,000 barrels per day to 32.76 million barrels per day. The rise in production was boosted by huge increases in Libya and Saudi Arabia’s output. Saudi Arabia aims to replace Iranian crude, which would be lost once US sanctions take effect from November 4.

US President Donald Trump has very often criticised OPEC and demanded that it increase the production so that prices could come down. Iranian crude output declined to 3.45 million barrels per day in September, from 3.6 million the month prior.

On the other hand, OPEC cut its world demand growth forecast for 2019 due to headwinds to global economic growth, trade disputes and weakness in emerging-market economies.

For 2019, world oil demand growth is forecast at 1.36 million barrels per day, down by around 50,000 barrels per day from its previous estimate. Much uncertainty prevails regarding the US stance on Iran.

As a result, many countries have cut purchases of Iranian crude. Recent reports, however, suggest that the US may grant waivers on the sanctions.

Base metals were highly volatile this week. Aluminium declined sharply after Norsk Hydro said it obtained a permit in Brazil to use new technology to extend the life of a disposal area for its troubled alumina refinery. This should lead to restarting 50 percent of aluminium production.

Initially, zinc extended gains due to a consistent decline in LME (London Metal Exchange) inventories. The International Lead and Zinc Study Group demand for refined zinc would exceed supply by 322,000 tonnes this year and 72,000 tonnes in 2019.

However, later in the week, zinc weakened sharply due to the sell-off in global equities and on persistent concerns about China’s economy.

The International Monetary Fund (IMF) cut its global growth forecast for 2018 and 2019 due to the trade war between the US and its trading partners. This pressured base metals even more. Copper jumped after a Union official at top copper producer Codelco said smelter operations at its Chile mine would be halted for 60 days starting December 13, 2018 due to upgrade delays.

The outlook for crude oil is mixed. Both the IEA and OPEC have cut demand growth projections for 2018 and 2019, citing the escalating trade war between the US and China. This is a matter of grave concern.

Further, OPEC crude oil production has risen due to the huge increases in Libya and Saudi Arabia outputs. US and Russian crude output would also rise.

According to the IEA, non-OPEC output is forecast to expand by 2.2 million barrels per day and 1.8 million barrels per day in 2018 and 2019, respectively. Despite continuing production declines in Iran and Venezuela, the EIA has forecast that global oil supply and demand would be nearly balanced in 2019.

However, the US sanctions may contain losses in crude.

Disclaimer: The author is Head — Commodity Research & Advisory at Anand Rathi Commodities. The views and investment tips expressed by investment experts on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
First Published on Oct 14, 2018 09:48 am
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