The optimism over the US-China trade deal will soon fade and the real fundamentals of demand and supply, inventory, and the OPEC meeting will come into play in deciding oil prices.
The global slowdown is the talk of the town and so is the soaring oil price. Is the rally sustainable? Will it continue or the slowdown will ensure that oil prices come back down to $50?
WTI Oil price soared from $51 on October 4, 2019 to around $58.74 per barrel on November 22, 2019, move of around 17 percent in a short time. What led to this increase?
According to energy services company Baker Hughes, US drillers reduced the number of rigs for record 12 months in a row in November, taking the total count of rigs in operation to 668, the lowest since April 2017.
Moreover, the prolonged US-China trade dispute is showing some signs of resolution. The two biggest crude -consuming economies, it is expected, will soon sign a preliminary agreement to end the 16-month dispute.
US oil production, meanwhile, rose 100,000 barrels per day to 12.9 million bpd, a recent Energy Information Administration report said. The United States has been steadily moving towards becoming a net exporter of oil as exports rise.
Moreover, the inventory has been consistently increasing since September 2019. As on September 6, US crude oil inventory stood at 416 million barrels, while as on November 22, the absolute inventory level was 451.95 million barrels, effectively an increase of around 35.95 million barrels. At 452.0 million barrels, US inventories are about 3 percent above the five-year average for this time of the year.
Apart from oil, the rising product inventory, especially that of gasoline, stood at around 226 million barrels on November 22, an increase of around 9 million barrels when compared to the absolute inventory of 217 million barrels on November 1. Total motor gasoline inventories are about 4 percent above the five-year average for this time of year.
OPEC and Russia meeting
The OPEC+ Russia agreed to cut 1.2 million bpd, accounting for 1.2 percent of the oil global demand. Russia has already agreed to produce 228,000 bpd less to around 11.18 million bpd. However, Russia's output this year (2019) has averaged 11.25 million bpd, meaning it is overproducing by about 70,000 bpd, according to Reuters calculations.
For three years, OPEC and non-OPEC nations have curbed oil output to balance the market and support prices, but Russia has been measuring its production differently from the others. Hence, Russia is likely to call on fellow oil producers to change the way Moscow's output is measured, when most of the world's biggest oil producers meet in Vienna in December.
The meeting will be crucial for all investors, as oil output quotas will be up for discussion and will create price volatility.
The optimism over US-China trade deal will soon fade and the real fundamentals of demand and supply, inventory and the OPEC meeting will have their part in deciding the price trajectory in the month ahead.
The overall scenario says that oil prices will have a real struggle at $60 unless the global situation improves. Rising oil production and inventories are a sign of slack in the economy and prices will have to be in line with real demand.
Hence, the possibility of WTI oil prices moving far higher that $62 is bleak and prices will direct lower towards $57-mark in a month. On the MCX, oil prices may also cap around Rs 43,00 and will correct towards Rs 39,00-mark in a month time frame.
(The author is Chief Analyst- Non Agri Commodities & Currencies at Angel Broking.)Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.