Short-covering in oil should drive prices higher if Russia also announces output cuts, but gains will be limited since the cuts will not be enough to overcome the demand decline.
US West Texas Intermediate (WTI) and MCX crude oil futures settled higher in the week gone by as investors expected OPEC+ to come through with the production cuts advised by the technical committee in the week-ending February 7. Short-covering may have also contributed to the rally, with traders turning a little more optimistic that the coronavirus-driven demand crisis had peaked.
Markets are also on mark for their first weekly gain since early January. In the week ending February 14, April WTI crude oil settled at $52.05, up 3.44 percent, and MCX Crude oil (February) futures settled at Rs 3,710, up 2.44 percent.
Citing coronavirus outbreak, OPEC cut its forecast for oil demand growth this year. OPEC foresees daily demand growth in 2020 to be 9,90,000 barrels per day, which is below 2,30,000 bpd forecasted earlier.
The International Energy Agency (IEA) said oil demand is set to fall YoY in the first quarter for the first time since the financial crisis of 2009 due to the coronavirus outbreak in China.
China is the largest importer of oil and is among the top consumers of the world after the US. The spread of coronavirus has impacted oil consumption and resulted in a further slide in already oversupplied market.
Crude oil jumped more than 3 percent earlier in the week, as traders eyed deeper production cuts from OPEC, and as China reported the lowest number of new coronavirus cases since the end of January, easing concerns about a drop-off in demand for oil. Ahead of the weekend, traders were reacting as if China had controlled the spread of the coronavirus.
Similarly, India's fuel demand fell 0.6 percent in January compared with the same month last year. Consumption of fuel (a proxy for oil demand) was calculated 18.41 million tonnes, data from the Petroleum Planning and Analysis Cell (PPAC) of the oil ministry showed.
The Energy Information Administration (EIA) said that US crude supplies rose by 7.5 million barrels for the week-ended February 7. Traders were looking for a 2.9 million barrels rise in oil demand.
The EIA data also showed a supply decline of 1,00,000 barrels for gasoline, while distillate stocks fell by 2 million barrels. Traders were expecting gasoline inventories to rise to 7,00,000 barrels; however, distillates were forecasted to fall by 9,00,000 barrels.
The bearish demand forecasts from OPEC and IEA are likely to encourage OPEC and allies, especially Russia, to implement additional production cuts.
The major producer said it needed more time, but the new demand forecasts are likely to encourage Russia to sign off on the OPEC+'s deeper cut.
Short covering in oil should drive prices higher if Russia also announces cuts, but gains will be limited since the cut will not be enough to overcome the demand decline. If Russia passes on the cut, then this will be a disaster, plunging prices to a multiyear low.
(The author is Head of Research at CapitalVia Global Research Limited- Investment Advisor.)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.
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