What is driving the volatility in oil markets?

Ruchi Agrawal
Moneycontrol Research

Crude oil prices softened on October 5 to close around the $83/billion barrels (bbl) mark after rising to $86/bbl. The prices declined after the US government indicated it might consider relaxations on oil imports from Iran. Saudi Arabia’s production boost and the willingness to replace the Iranian barrels, easing the supply side pressure also led to the price fall. An uptick in the US oil inventories according to last week’s data also contributed to the softening.

Rising uncertainty in the global markets and trade tensions had rapidly pushed up crude oil prices in the last few weeks. Despite an overall upward momentum, oil prices have been highly volatile. We discuss the various factors that could potentially drive crude oil prices in the coming weeks

US softening of the Iranian sanctions stand

With the deadline for the imposition of the sanctions on Iran nearing and rising uncertainty around the potential impact of noncompliance, oil imports from Iran to major consumers (including India) dipped in the last few weeks.

The US now seems to be softening its stance on the sanctions. The expectation of probable negotiations and lower-than-expected cut of Iranian barrels from the crude market relieved soaring crude prices.

Saudi's willingness to pump more oil

Saudi Arabia’s crown prince indicated the country has pumped up oil production and is willing to replace the lost Iranian barrels in the last few weeks. This also led to the softening in global crude oil prices.

However, despite an uptick in production from Saudi, crude oil prices and supply side pressure has been stiff. A major portion of the current uptick can be attributed to the production constraints in Libya, Venezuela and Canada. Persistent internal issues within major oil exporting countries could keep prices high in the coming weeks.

US crude oil inventories and rig count

After a consecutive fall in the last few weeks, the US oil inventories saw an uptick in the last reported data which also contributed towards the softening in the crude prices. Despite an increase in inventories, the US oil drilling rig count fell for a third consecutive week, as rising costs and pipeline bottlenecks hindered new drilling since June. This might lead to falling inventories in the upcoming weeks.

US willingness to release strategic petroleum reserves

The US is considering teaming up with other Western countries to simultaneously release emergency oil stock. They are reviewing options ranging from a 5 million to 30 million barrels release from its strategic oil reserve to cool pump prices ahead of the congressional elections in November, which coincides with the timeline when sanctions on Iran are due to snap back. Although this move is not imminent, it is seen as a tactic to increase pressure on OPEC to pump more oil.

Hurricane season and the upcoming winters

The months of September and October are infamous for hurricanes in the US. Alerts around the forming up of hurricanes last month led to the precautionary close down of rigs around the Gulf of Mexico, taking crude prices higher. Continuing uncertainty around weather development would be something to watch out for.

Situation for India

Soaring crude oil prices have been a huge burden for the Indian consumer and have brought the taxation structure and margins of oil marketing companies under the scanner leading to mass criticism. Any reduction in the global crude prices comes as a much sought after relief for both the oil companies as well as the government.

Amid growing uncertainty of the repercussions of the Iranian sanction, Indian imports from Iran have shrunk, though the Indian government had indicated it would continue with the Iranian oil imports. India in the latest move has asked Saudi to boost up production in order to bring about some softening in the crude oil prices.

Outlook

The volatility in the crude oil prices has been immense in the last few weeks and is expected to continue. We believe the approaching November deadine for Iranian sanctions could provide some clarity over the global geopolitical moves and would be one point in the timeline to watch out for. Till then prices are expected to remain volatile and news flows could have significant impact on the prices in both directions.

Though we believe that very high levels of crude is not sustainable as more and more producers get on board the supply ship, the irregularities due to the hurricane season in US, uptick in demand in winters, slow growth in rig count in the US, persistent issues in major oil producing nations and economic slowdown amid global trade wars are something that would dictate the contours of prices in future.Follow @Ruchiagrawal

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