Black Gold Loses Its Shine

 
Naveen Mathur  Associate Director of the Commodities & Currencies businesses at Angel Broking

Non-agricultural commodities have been at the helm of losing their value in the past one month, and crude oil is the second worst performer in the entire lot after base metals. The NYMEX WTI oil prices lost value by around 11.5 per cent in the past one month ending November 20, 2015. The underlying factor behind the weakness in oil prices is a combination of slow growth in global economy and low demand while the supply side remains very comfortable, thereby creating bearish sentiments. The International Monetary Fund has cut its global economic growth forecasts for three years in a row. It has revised its forecast of global GDP growth in October 2015 to 3.6 per cent versus its previous forecast of 3.8 per cent made in July 2015.

The bearish fundamentals suggest that oil traders and investors are preparing for another downturn in prices by March 2016, expected to be an unusually warm winter that will act as a dent to demand just as Iran’s resurgent crude exports are hitting global markets after the end of their sanctions. On the supply side, the growth in the US’ unconventional production appears to be slowly abating as seen in the falling oil rig count. The US rotary rig count from Baker Hughes was down 10 at 757 for the week of November 20, 2015. It is 1,172 rigs (60.8 per cent) lower than last year. The rig count has been the lowest since the week of April 19, 2002 when there were 749 active rigs. The number of rotary rigs drilling for oil was down 10 at 564. There are 1,010 fewer rigs targeting oil than last year. Rigs drilling for oil represent 74.5 per cent of all drilling activity.

On the other hand, an upsurge in the organisation of petroleum-exporting countries continues to pump in more than 30 million barrels per day, as has been the case for the past nine months. Besides, robust global inventories also remain a cause of concern as oil prices continue to decline. OECD commercial inventories rose counter-seasonally by 13.8 mb to stand at a record near 3 billion barrels by end-September. The pace of global stock-building slowed during the third quarter to 1.6 mb/d from 2.3 mb/d in 2Q15, but remained significantly above the historical average. Global refinery runs sank by 1.2 mb/d in October to 78.2 mb/d with seasonal maintenance in full swing, leading to a significant reduction in annual throughput growth. However, the good news for all the consumers of oil is that the global oil inventories at a record 3 billion barrels is providing a degree of comfort.

The Way Forward

Oil below USD 50/bbl is a powerful driver in rebalancing the global oil market, but the big question is about the equilibrium will be restored. Besides, the speculator behaviour suggests that oil markets are ramped up for further price fall as hedge funds and money managers continue to cut long positions. As on November 17, net long positions stood at around 1,07,112 contracts, which represents a fall of around 53,599 contracts or 30 per cent decline when compared to 1,60,711 contracts as on October 20, 2015.

Oil markets are well supplied, with recent figures showing global production outstripping demand by around 1.5 million bpd. Besides, IEA forecast says that global demand growth is expected to slow from its five-year high of 1.8 mb/d in 2015 to 1.2 mb/d in 2016. On the other hand, rising US’ crude inventories that are at a record high of 487 million tonnes as on November 11, 2015 has been a cause of concern, signalling bleak demand. All these factors will make crude oil prices vulnerable to further losses in the next two months. Brent crude oil (CMP: USD 44.66) will go lower towards USD 40 while NYMEX crude oil (CMP: USD 40.39) prices can possibly head lower towards USD 35/bbl. MCX crude prices (CMP: Rs 2,833) can head lower towards Rs 2,600/bbl in the same time frame.

Disclaimer: The author is Associate Director - Commodities & Currencies Business, Equity Research & Advisory, Angel Broking. The above opinion is of the author and for reference only.