Hareesh V
Crude oil hit its highest level in three-and-a-half-years in the week gone by. Oil prices have been on a recovery mode since 2016. The momentum is still continuing, despite worries about the trade stand-off between the US and its allies, which send global stocks and commodities tumbling down.
The Organisation of the Petroleum Exporting Countries and other top producers, including Russia, have reduced daily crude output by 1.8 million barrels. Supply disruptions owing to geopolitical tensions, record global demand and positive outlook from analysts and investment banks aided positive momentum in the oil market.
However, the recovery in momentum was gradual as the reduction in supplies due to OPEC led voluntary cut and unplanned supply disruption from Canada, Libya and Venezuela were virtually balanced by high US shale output.
Shale oil production is at its peak in the US, with refineries operating at its highest average capacity utilisation due to record worldwide demand. At present, the US is the second largest oil producer behind Russia, and their inventories continued to be on a declining trend.
Recently, OPEC and its allies agreed to increase daily production limits at their latest meeting held at Vienna. Against a backdrop of calls from the US, China, and India for more oil supply to stabilise the market, OPEC decided to raise output. However, the group failed to announce a clear target for the same.
Enhancing production largely benefits Saudi Arabia as most other member countries are currently pumping oil close to its capacity or losing output due to various reasons.
While the market was prepared for wide swing after the OPEC meeting, the outcome had initially limited the price impact. However, prices recovered swiftly with the WTI crude surging to $74 a barrel, its highest level since November 2014.
Amid expectations that the proposed hike cannot offset the global supply deficit, US calling out to countries to cut imports from Iran, and supply disruptions propelled the rally in crude oil prices.
Asian Brent crude oil, which was trading at a premium against WTI on concerns over OPEC supply, has now reversed the trend after OPEC’s decision to hike output. The premium of ICE Brent crude over NYMEX WTI was around $11, the highest in more than 3 years, early this month before falling to $5.
Tracking international prices, domestic crude futures surged to its highest level since September 2014 recently. Apart from the overseas factors, weakening domestic currency against the dollar bolstered crude oil prices in the Indian market. The rupee touched a record high of Rs 69.09 versus dollar last week.
Going forward, increased instability in the Middle East is alarming the oil market. Rising geopolitical tensions is putting pressure on oil. Growing concerns over US’ relations with major oil producers like Iran and Venezuela is threatening the market. Reposition of sanctions on Iran is likely to affect top Asian buyers like Japan, South Korea and India.
The US is demanding that all countries stop buying crude from Iran, OPEC's third largest oil exporter, by November, raising concerns over supply tightness.
The threat of trade war between the US and its allies may hit sentiment as well. The ongoing positive sentiment is likely to extend unless there is any fundamental change.
If WTI trades consistently above $72 a barrel, it may provide room for more upside. A trend reversal is expected only on a close below $64 a barrel.
Disclaimer: The author is Head, Commodity Research at Geojit Financial Services. The views and investment tips expressed by investment expert on Moneycontrol are his own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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