Cor­rec­tions likely to Keep Crude Un­der $50

The Economic Times - - Commodities Plus - Kishore Narne

Busi­ness Head-Com­modi­ties & Cur­ren­cies, Moti­lal Oswal Com­modi­ties Bro­ker strength. How­ever, we have seen ev­i­dence of pro­ducer hedg­ing with oil prices at higher lev­els which will prove to be a long term head­wind to oil prices.

The other main driver for the bullish­ness among spec­u­la­tors is the de­cline in US out­put. US out­put is surely slow­ing with to­tal US pro­duc­tion down 3.2% yo-y to 9.02 mil­lion bpd in Q1af­ter hit­ting a peak of 9.6 mbpd in June 2015 driven by out­put de­clines in ma­jor shale plays. This is the first time in the last few years that oil out­put has de­clined com­pared to last year. We have seen that shale out­put has been de­clin­ing for al­most a year now and is ex­pected to fall to 4.8 mil­lion bpd by May from a peak of 5.5 mil­lion bpd in March 2015, a de­cline of 12.7%. Baker Hughes data show that US rig count has been fall­ing for more than a year now as pro­duc­ers im­prove pro­duc­tiv­ity of ex­ist­ing wells and idle less pro­duc­tive ones. Im­por­tantly, if oil prices re­bound above $50, pro­duc­ers might restart drilling which will lead to a pro­duc­tion re­bound. We saw a sim­i­lar trend in July and Au­gust when WTI prices were hover­ing close to $60 and there­fore we be­lieve those lev­els will act as a very strong cap for prices this year as well.

The theme in crude oil mar­kets re­mains about over­sup­ply but the floor for prices has surely moved higher due to the lon­gawaited slow­down in US pro­duc­tion. While re­cent sup­ply dis­rup­tions may still give the price rally more legs in the short term, OPEC main­tain­ing out­put at higher lev­els com­bined with Iran in­creas­ing out­put will keep a lid on oil prices. Prices are un­likely to cross $50 and the ex­tent of spec­u­la­tive po­si­tions in crude makes it vul­ner­a­ble for a cor­rec­tion. In our base case, we ex­pect prices to con­sol­i­date in a lower range of $3545 for most part of the year.

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