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Wild Swings

August 2016

Stockpiles of refined oil continue to build across the world. This is a good piece of news for the consumers, but not for the oil bulls, writes Dharmesh Bhatia, Manager – Commodities Market, Emirates NBD Securities

There are several reasons for the crude oil prices reaching at the peak of $52, increasing from the bottom of last 13 years i.e. $26.05 in the first two quarter of the current year. It can be attributed to steady increase in the energy demand, decrease in the US production and un-planned production cut in Nigeria and Canada. However, doubt prevails whether this rally would sustain or not. Normally, refineries resort to excessive production to cope with the summer demand for petrol and gas fire heating oil for which they purchase crude oil and transformed it into the refined energy products.

Energy-ChartAug16

But currently there is glut of such refined products across the world. Refineries have produced so much gasoline during the current year that it more than its demand. This is good news for the consumers, but not for the bulls. Crude prices are under pressure from the gasoline and this scenario would continue even during the third quarter. If there would be less purchase by refineries then crude oil producers would be forced to divert it towards storage and consequently prices come under tremendous pressure.

During the month of July, the International Energy Agency (IEA) had stated that now time has come for the oil market to adopt re-balancing strategy. However, given the current scenario it may not happen in the third quarter of 2016. The US crude oil stock decreased by 14 million barrels in the month of May. However, the bad news is such that inventories reached at the peak of 522 million barrels during last week which was 60 million barrels more than the average of last five years.

On last Thursday of July, the US Energy Information Administration had said that the crude oil supply decreased by 2.5 million barrels in the week ended on 8th July while gasoline supply increased by 1.2 million barrels. Private company’s which presents reliable rig count of the US had stated that the number of oil drilling rigs increased by 6 during the week ended on 15th July to be at 357, but it was much less as compared to 638 rigs registered during the corresponding period of the last year.

During July, gasoline futures have declined more than 7.3% and that of crude oil by 10% till date from the peaks. In a note, Investor thinks that ultimately the over-supplied gasoline market has spoiled the game for both, the producers as well as refineries. Generally, refiners are going into maintenance from September and conventionally purchase less crude oil. Now, suffering from huge glut, refineries would land in the market to empty their stock by offering huge discount.

Further, third quarter can be weak but it would strengthen the base for energy market during fourth quarter as major heating oil demand would emerge for the US winter. Investors should trade in the crude oil futures by taking account all these fundamentals and technical levels.

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