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Last Updated : Jan 06, 2019 10:03 AM IST | Source: Moneycontrol.com

Anand Rathi expects sharp short term volatility in crude oil

US crude oil production may be further boosted in 2019 as infrastructure constraints in the Permian Basin could by then be resolved

Moneycontrol Contributor @moneycontrolcom

Ravindra Rao
Anand Rathi Commodities

After falling nearly 30 percent since November, crude oil has turned quite volatile in recent sessions.

According to the US Energy Information Administration, crude oil output in October rose to an all-time high of 11.537 million barrels per day (bpd).

The US has become the world's leading crude producer, surpassing Russia and Saudi Arabia. These three countries contribute around 40 percent of global crude oil production.

US crude oil production may be further boosted in 2019 as infrastructure constraints in the Permian Basin could by then be resolved. According to the EIA, production is expected to average 12.06 million bpd in 2019, up 1.18 million bpd from 2018.

The production cut by The Organisation of Petroleum Exporting Countries (OPEC) came into effect from January 1. It would be important to see how well it actually delivers. Last month, OPEC and non-OPEC nations agreed to cut production by 1.2 million bpd from January 1.

According to the deal, OPEC would cut production by 800,000 bpd while non-OPEC would make up the rest. Markets are concerned about whether the recently announced production cut by OPEC would suffice to curb the glut or not.

Hence, there is talk that OPEC might cut production more-than-previously anticipated. But the market is suspicious about Saudi Arabia's crude oil strategy: Whether Saudi Arabia would cut crude production by the desirable amount or not? This is the major concern now for the market.

In April, OPEC will review the impact of its production cut. It has rescheduled its mid-year meeting to April. If the output cuts are not adequate, OPEC is ready to hold an extraordinary meeting and will do what is needed to balance the market.

Media reports suggest that OPEC's crude oil production declined in December 2018. Even in November last year, production fell slightly, to 32.96 million bpd from 32.98 million bpd in the month prior. But, in November 2018, Saudi Arabia's crude oil production rose while that of Iran fell sharply.

Hence, it is filling the gap left by Iran. Saudi Arabia also needs higher crude oil prices as crude exports are its largest revenue source. Simultaneously, Saudi Arabia has to keep US President Donald Trump happy. Trump has repeatedly asked OPEC to lower crude oil prices.

This is especially after the Republicans lost the mid-term elections. Nigeria's crude-oil production increased 9 percent to 2.09 million bpd in 2018. Its crude oil output is further expected to increase to 2.5 million and 3 million bpd in 2019 and 2020, respectively. Unlike previous deals, this time, Nigeria was not excluded from production cuts.

Investors are nervous about global economic growth. As a result, there is a huge sell-off in global equities. Rising trade tensions, monetary tightening and geopolitical challenges are among issues that might slow economic growth in 2019. A slowdown in the global economy might shrink demand for crude oil.

Already, the trade war between the US and China has weighed on demand. For 2019, OPEC has cut its demand projection for crude oil to 31.4 million bpd, one million bpd lower than in 2018.

Given the uncertainty in global financial markets and OPEC's strategy, crude oil is expected to experience sharp volatility in coming sessions.

The author is Head - Commodity Research & Advisory, Anand Rathi Commodities.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies 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 Jan 6, 2019 10:03 am
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