Moneycontrol
HomeNewsBusinesscommoditiesRally in oil prices not justified by fundamentals as demand recovery globally remains a major concern: Navneet Damani of MOSFL
Trending Topics

Rally in oil prices not justified by fundamentals as demand recovery globally remains a major concern: Navneet Damani of MOSFL

Looking at the current rally, it seems like the current price rally is unwarranted and begs for a correction, as demand is not predicted to recover substantially until around the third quarter.

March 10, 2021 / 14:14 IST
Story continues below Advertisement

Reportedly, the International Energy Agency has asked OPEC and its allies to surge production levels to pre-pandemic levels faster than planned. The group had earlier said a production increase that would have output at 5.8 million barrels per day below pre-COVID levels.

WTI prices skyrocketed and traded higher for the fourth consecutive session, touching the highest levels in nearly two years after OPEC+ shocked the markets with their decision to keep production cuts largely unchanged in April. It looks like the crude complex price cycle appears to be repeating itself, with OPEC+ opting to continue restricting output rather than responding to falling inventories, rising prices and increasing backwardation. Prices got a further boost on constructive Chinese trade data released over the weekend, along with news that the $1.9 trillion US stimulus package was passed by the Senate.

Major Banks upgraded price forecasts, with some calls for oil reaching north of $100 next year. Markets cheered the fact that OPEC is not worried about tightening markets, nor higher prices which will bring shale players back in the markets. The most surprising fact was Saudi’s intention to extend its voluntary oil output cut of 1 million bpd and would decide in coming months when to gradually phase it out. This caught investors by surprise and led some to revise upwards their price forecasts. The Saudis have raised prices for its crude for shipment to Asia and the US next month after OPEC+ extended oil supply constraints, pointing to a tightening physical market.

Story continues below Advertisement

On the premium front, the geopolitical premium is once again in picture after news that Iranian-backed Houthi rebels attacked a Saudi oil export facility over the weekend. The target was in fact, the Ras Tanura export facility, which is the world’s largest export facility, capable of shipping around 6.5 million barrels per day of crude oil, and with a storage capacity of around 33 million barrels.

All of Saudi Arabia's key crude oil grades -- mainly Arab Heavy, Arab Medium, Arab Light and Arab Extra Light -- load from here along with condensate and refined products. Saudi’s have however reported no damage to any facility or any disruption. The attack followed a missile launch by Houthis rebels on Saudi Aramco facilities at Jeddah on March 4th. The geopolitical premium of disruption is expected to remain as Iran is expected to continue the ramp up attacks through proxies as a low cost way to bleed Saudi Arabia.