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Bear Hug

September 2016

The belief in the market is that any decision taken in respect to crude oil production freeze at the OPEC meeting to be held at Algiers this month can trigger high volatility, writes Dharmesh Bhatia, Manager – Commodities Market, Emirates NBD Securities

Crude oil market entered into bull territory on reports of an informal OPEC meeting to be held during September. However, this rally isn’t likely to prove sustainable. On August 19th 2016 afternoon, oil services firm Baker Hughes said that the U.S. weekly oil rig count rose to 406. The number of oil rigs nationwide has increased weekly in the last eight weeks. On the same day, Brent crude came down to $50.34 from a peak of $51.22 while WTI fell from the high of $48.74 to $47.94.

Energy-Chart-Sep16

Crude oil prices have been very volatile this year. Reaching a twelve year-low of $26.05 on January 10, the value of WTI jumped by 90% on June 8 to 51.67 but faced tremendous pressure again mid-July. While crude oil prices increased by 8% during mid-August, a parallel rally hasn’t been witnessed in energy stocks. Thus, investors now suspect that the current rally is just speculative. Crude oil has increased by 20% after dropping to $39.41 on August 2 but, the S&P 500 equity index of the energy sector has increased by merely 1.78% during this period. Dow Jones industrial average has increased by just 1.5% till date.

The belief in the market is that any decision taken in respect to crude oil production freeze at the OPEC meeting to be held at Algiers can trigger high volatility. Ahead of this meeting, Saudi Arabia has declared an oil market share war against Iran and Russia, its primary competitors, by reducing prices in the Asian markets. During June, the kingdom exported a record breaking 880,000 barrels crude oil and its products. How would OPEC have been able to take a decision for production cuts under such circumstances? Market participant were well aware that the Vienna conference to curb supply was going to be an inevitable failure.

Currently, there are two reasons that a crude rally has entered into the bull phase. First, the production cut agenda at the OPEC meeting and two separate reports indicating that crude oil stock is decreasing in the US suggest reducing supply and second, American demand for gasoline is increasing rapidly. Besides additionally, in the aftermath of US Federal Open Market Committee (FOMC) July meeting, the dollar index of the currency basket came down due to reduced optimism about increased interest rates, which enabled crude oil to move northwards.

On the supply side, oil rig count is on the rise in the US. Last week’s figures show the highest count since February 19. Which means production in the US is increasing on the basis of increased prices. Last week, the US Energy Information Administration stated that the average daily production was registered at 152,000 barrels during the week ending on August 12, highest since the last 15 months.

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