Corrections likely to Keep Crude Under $50
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.