Last Updated : Nov 22, 2018 10:36 AM IST | Source:

Crude oil to be volatile ahead of OPEC meeting in Vienna: Anand Rathi

Growth is slowing in major economies of the world. Emerging market economies are vulnerable too on account of the Federal Reserve's tight monetary policy, the muscular dollar and financial market volatility

Moneycontrol Contributor @moneycontrolcom

Ravindra Rao

Crude oil is considered volatile. The IEA chief, Fatih Birol, recently urged key oil producers not to cut production as it could have negative implications for the market.

According to Birol, markets are currently well supplied but spare capacity in Saudi Arabia is thin and cuts by key players could tighten markets. US president Donald Trump has also warned that Saudi Arabia and OPEC should not cut production.

These warnings have come ahead of OPEC's bi-annual meeting in Vienna on December 6.  It will be considering reducing crude-oil production by around 1 to 1.4 million bpd. The recent dramatic decline in crude oil prices has come as a huge surprise for the market after Trump unexpectedly granted eight countries waivers from Iran oil sanctions.

Media reports say Japan and South Korea will resume Iranian crude-oil imports from January 2019. However, the American Petroleum Institute reported a drawdown in inventories for the week ending November 16. This has provided the much-needed relief to crude oil.

On the other hand, base metals continue their rollercoaster ride this week too. Growth is slowing in major economies of the world. Emerging market economies are vulnerable too on account of the Federal Reserve's tight monetary policy, the muscular dollar and financial market volatility.

Growing trade tensions between the US and China are a matter of concern. The US and China have both expressed the need to resolve the trade conflict. But the tension was visible as leaders attending the Asia-Pacific Economic Cooperation Summit in Papua New Guinea failed to agree to a joint communique for the first time in history.

The focus would now shift to the G-20 summit slated to be held next week. Chile's state copper agency Cochilco has cut its 2018 and 2019 copper price prediction due to low demand for the metal. This is the second projection cut in the last six months.

Nickel is also under pressure due to concerns about stainless steel. Increasing nickel pig iron production and rising Shanghai nickel inventory also pointed to further nickel weakness.

Ahead, crude oil is expected to be quite volatile in coming sessions. OPEC crude oil production rose to 32.90 million barrels a day in October, from 32.77 million barrels a day the month prior.

US crude oil production continues to increase rapidly. The IEA has warned that global oil supply will outpace demand throughout 2019. Hence, the oversupply glut may weigh on crude oil prices. OPEC recently cut its crude-oil demand growth forecast for 2019.

The sell-off in global financial markets points toward a slowdown in global economic growth. However, the expectation is that OPEC might cut crude-oil output by 1-1.4 million bpd in the Vienna meeting because of weak crude-oil prices.

Besides, geopolitical tension adds to the risk. Trump has said that the US stands by Saudi Arabia following the alleged murder of journalist Jamal Khashoggi by Saudi agents. This is despite the fact that the CIA report concluded that Saudi Crown Prince Mohammed bin Salman ordered Khashoggi's killing.

Hence, there is also apprehension that Saudi Arabia may not go in for a large production cut and risk upsetting Trump. Saudi Arabia may also find it tough to convince Russia about a potential output cut.

Hence, the focus would shift to the OPEC meeting in Vienna. Overall, crude oil may experience sharp volatility in coming sessions.

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

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First Published on Nov 22, 2018 10:36 am
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