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Crude Awakening

April 2016

While crude oil is expected to trade with a positive bias, fresh longs should be avoided at elevated levels, says Dharmesh Bhatia, Manager – Commodities Market, Emirates NBD Securities

Last month, the international benchmark Brent crude jumped by 5% and quoted at $37 while the US benchmark WTI (West Texas Intermediate) reached at the peak of $34.69. However, later this rally was supported by fundamentals and prices rallied further. Major upheaval in prices has been witnessed so far during the current year. The Brent was dropping to a 12 year-low of $27.10 a barrel in January before embarking on an uneven recovery. Daily swings of more than 7% have been recorded on four occasions in February alone. Between 2012 and 2013, when oil averaged close to $100 a barrel, there was only one trading day when Brent moved 7% over the entire period.

In the second of weak of March, 5% jump was witnessed with assumption about supply crunch in the global market because of disruptions in the pipelines of Iraq and Nigeria. The stoppage in the pipeline of Turkey cut off about 600,000 barrels a day of crude from Iraqi Kurdistan for the past two weeks, with reports suggesting the line may not be back until the March end. The leakage in the pipeline of Nigeria Royal Dutch Shale Company has been described as ‘force majeure’ and the production of daily 250,000 barrels Forcados crude has been suspended. Nobody knows when this production would resume.

Brent crude may witness monthly price increase, first time since October, as 850,000 barrels per day production of above two countries would be out of the market which constitutes less than 1% of the total global demand. Talks are being held between Russia, the biggest exporter country outside OPEC cartel and Saudi Arabia, the biggest oil producing country in the OPEC to reach at an agreement for production freeze, though it is yet to win the support of all OPEC members. During a major industry gathering in Houston last month Ali al-Naimi, Saudi Arabia’s oil minister, ruled out the possibility of cutting output, damping hopes of more aggressive action to curb a glut estimated by some traders to be as large as 2m b/d.

However, Eulogio Del Pino, Venezuela’s oil minister said that Qatar, Russia and Saudi Arabia will hold a meeting in March to discuss efforts to stabilize oil markets. On the other end, Baker Hughes, the US rig count company stated that the US rig drilling number at the week ended on 19th February reduced from 413 of the previous week and remained at 400, which were 986 during the corresponding period of the last year. Under the direct impact of all these news, money managers and hedge funds have considerably reduced their net short position recently.

NYMEX crude oil trades near $38 per barrel after a sharp 7.2% gain last week which marked its fourth weekly gain. Crude rose as high as $39 per barrel, the highest level since December 7, 2015. Crude has witnessed a sharp rebound since hitting a 13 year-low of $26.05/bbl in early February. Crude has benefitted from improved risk appetite amid hopes of additional central bank monetary easing measures. Also supporting the price are prospects of easing supply amid slowdown in US crude production and OPEC’s production freeze. While we expect price to trade with a positive bias, fresh longs should be avoided at elevated levels.

ICE Brent crude rose 4.3% last week and spread between WTI and Brent crude narrowed to near $0.3/bbl. WTI may remain at a discount as optimism about US economy will be countered by higher US supply.

Stocks and Demand
The US Energy Information Administration’s (EIA) weekly report noted a 3.88 million barrels increase in US crude stocks largely in line with market expectations of 3.9 mn bbl rise. Stocks have reached a fresh record high level. Stocks at Cushing, the delivery terminal for NYMEX crude futures, rose to a fresh record high level of 66.9 million barrels. US crude production was largely unchanged at 9.078 million barrels per day after six weeks of decline. US crude production has fallen to the lowest level since November 2014 due to drop in rig count. The number of rigs drilling for crude fell by 6 to 386 rigs, the lowest level since 2009. EIA however noted a bigger than expected 4.526 million barrels decline in gasoline stocks and 1.119 mn bbl decline in distillate stocks. Demand rose in the report week. Crude demand, as measured by total product supplied, averaged 19.864 million barrels per day, up 3.5% from a week ago. Gasoline demand rose 3.2% to average 9.411 mn bpd while distillate demand rose 10.2% to average 3.706 mn bpd.

WTI crude May contract traded at a discount of $0.3/bbl to Brent crude as against a discount of $0.97/bbl a week ago. WTI crude outperformed Brent amid signs of slowdown in US crude production and continuing decline in US crude rig count. Brent was affected by countering view of OPEC and Iran over production freeze. WTI will remain in discount against Brent and spread may remain below $1/bbl. We may see some volatility on position squaring near contract expiration of NYMEX April contract.

Highlights of Crude Oil in March 2016
• NYMEX crude rose 7.2% marking its fourth weekly gain
• Crude remains supported by improved risk appetite and prospects of lower supply
• ECB announced spate of monetary easing measures; Draghi does not see more cuts
• China’s crude imports rose 19.1% to 31.8 million tonnes in Feb
• Iran will join production freeze once its production reached 4 mn bpd, said Oil Minister
• Oil prices might have bottomed out, said International Energy Agency
• The US dollar index fell 1.1% marking its second weekly decline
• The number of rigs drilling for crude oil fell by 6 to 396 rigs, lowest since 2009
• EIA noted a 3.88 mn bbl increase in US crude stocks for the week ended March 4
• WTI crude may remain at discount on higher US supply

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