Since the end of January, all attention turned to decline in oil rig count in the United States and the recent Brent price spike is on account of just that, is the word coming in from Vandana Hari, Asia editorial director at Platts. She says oil production levels is also putting a downward pressure on West Texas Intermediate (WTI) crude.
According to her, the rally in oil futures is also on the back of short-covering. A lot of extremely short positions got built in December and January, which is when the news of US rig position came in and though right now there is oversupply, investors realise that 6-8 months down the line, the situation will be a lot more balanced, she adds.
Going ahead, if the Russian economy improves, demand situation will get better, says Hari. However, she adds that at the moment it is a little difficult to predict whether European demand will pick up.
Below is the verbatim transcript of Vandana Hari's interview with Anuj Singhal and Ekta Batra on CNBC-TV18.
Ekta: Can you start by telling us what led to the bounce back we have seen in Brent crude prices and where do you expect it to possibly average in the next three months?
A: It started at the end of January you might recall when all attention turned towards a very sharp drop in the US oil rig count that was reported by a company called Baker Hughes, which does this, every Friday it releases this report. Since then it has only been on the way up in tandem with the continuous decline in oil rigs that Baker Hughes has been reporting since the end of January.
So if you look at the latest report which came out last Friday, US oil rigs have been declining for ten straight weeks now nearly 30 percent of the rigs that was drilling for oil in the US onshore have been removed compared with the peak of last October. That has sparked off the rally and of course then the market started paying attention to all those billions of dollars of E&P spending that the companies have been taking off the table as well. There is a little bit of distinction there of course the E&P spending that has been taken off the table should manifest itself in lower production over the next three-five years timeframe. But it is just somehow these factors have all come together for the bulls and of course there still remains a divide in the market between the bulls and the bears.
Anuj: The other thing that is interesting is that the spread between brent and West Texas Intermediate (WTI), which had narrowed down to as low as USD 2 per barrel is now back to almost USD 10 per barrel, do you think that speculative activity is back in brent and how do you think this premium is going to move over the next few weeks?
A: I would say that is more the downward pressure on WTI right now on US light sweet crude because as we all know, it is the US where production is still gushing. So all these rigs that I mentioned that are being removed were rigs that would have been searching for and producing new oil. So that is oil growth that we are talking of.
As far as the US’ actual crude production is concerned that remains near decade high. So I think the last figure we got was 9.23 million barrels per day, so plenty of oil coming out in the US still. Of course, in recent weeks it also had some trouble in the refining space, in the US a lot of trade of strikes at various refineries, some refineries have cut back their operating rates as well. So basically the storages are brimming and the US production is still continuing apace. So that is putting a lot of downward pressure on WTI right now.
Ekta: Leave us with your sense in terms of whether the geopolitical risks from Libya because we have seen some amount of shut down taking place there in terms of oil refineries, has that been factored into brent crude prices already additionally, maybe the ceasefire and the ease of tension within Ukraine and Russia is that also factored in to crude prices now?
A: Talking of Brent, our understanding is that a lot of essentially extreme short positions got built in the futures markets over the period of December and through January and when these reports started coming out of US oil rig count declining, the expectations or at least the bull side of the markets started thinking that maybe there isn’t going to be not just yet, there is still oversupply but six-nine months down the line there is going to be more of a balanced market. So that has led to the rally in the futures market.
As far as Russia and Ukraine is concerned, I think it is still a bit tentative. It will be very difficult at this point for oil markets to exactly factor that in. If all works out well, it should be a double positive in terms of demand, you should see a better demand growth, expectations of better demand growth in Russia of course if its economy does a little bit better with the lifting of sanctions and at the same time, if Russia is back on its feet economically then that will help Europe as well.
So a lot of the double whammy on Europe has also been because of sanctions on Russia but at this very point, it is very difficult to say and there are too many dots that need to be connected down the line to say that European demand is still seen negative year-on-year (Y-o-Y), so I don’t think that is a major factor in the markets right now.
As far as Libya is concerned, right now, the people especially the bears who are looking at the physical, they are still oversupplied, estimated anywhere between 1 million barrel per day and 1.5 million barrels per day of supply in excess of demand at least for the first half of this year. So any pullbacks or return to production in Libya right now is not having a major impact either way.
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