Is the recovery in oil prices here to stay?

Sugandha Sachdev

Crude oil prices have staged a remarkable recovery over the last few months, after the precipitous fall from the highs of $107.73 per barrel in June 2014, to the lows of around $42 per barrel in March this year. The interesting thing in this pullback was the gradual pace of recoveries, that have cooled off the mighty bears, which at one point of time, were looking so furious and anxious to knock down the prices further at any of the slightest opportunity given to them. Taking everyone by surprise ,it's been almost a vertical rally week after week and the sellers look to have just jumped out of the window. Let us have a quick review of the latest developments, that have helped the prices to inch higher and also discuss the expectations with regard to prices in the near future. The demand for oil generally increases in the summers as travelers take to the roads for holidays in Europe and the United States. This has helped to reduce the impact of a growing supply. Hopes of more economic stimulus in China, after disappointing data has also supported the prices in the recent past. While, there is a long way for world’s second largest economy to be back on track, but slightly encouraging set of industrial production and retail sales numbers that were released this week itself, are pointing towards some life coming back to it and rise in oil demand. The prices managed to nudge further higher on the back of declining US inventories that fell for the sixth consecutive week, the longest stretch of drops since August last year, suggesting a pickup in the refinery demand. Expectations that shale oil production will start decreasing from June through early 2016, after it reached to the highest level since 1972 in May 2015, has also underpinned prices. The fall in rigs drilling for oil to its lowest level in four years is indicating that production is slowing down in the US, thus easing the global supply glut. The prices have even shrugged off the concerns of growing supply from Saudi Arabia, the world's biggest crude exporter (that produced 10.33 million barrels a day in May, an increase of 25,000 barrels a day from April) on the statements from the Saudi Arabia officials that higher production was driven by higher demand. Markets were also closely focusing on the OPEC meet that was held in the first week of June .The Organization of Petroleum Exporting Countries pumped 30.975 million barrels a day of crude in May, and has agreed to keep its output ceiling at 30 million barrels a day. The prices did not falter, despite the announcement of no production cuts by the cartel; however its expectations that oversupply in oil will ease with a pickup in demand and slowdown in supply from non-OPEC countries lifted the sentiments. The recent surge in the oil prices from a technical perspective, qualifies as an intermediate relief rally within the major down trend, and all is not yet well for the oil bulls. The World Bank has downgraded global growth forecast to 2.8 percent from 3 percent seen in January and has also urged the US Federal reserve to wait until 2016, to raise interest rates, signaling towards the threats of global economic recovery process. This suggests that it might not be the beginning of a bull run for oil prices yet. However in the immediate short term, the trend is skewed in favor of the bulls, as long as the prices are trading above Rs. 3600 per barrel. There are still some more gains on the cards, where the prices are expected to make a march towards the levels of Rs.4150-4200 per barrel at MCX and around $65-66 per barrel at NYMEX. Traders are therefore advised not to buck the intermediate up trend, till the time there are clear evidences of it running out of steam, because as they say trend is your friend !