Crude oil price are likely surge further in 2016 as the recent price movement in oil markets suggests that the market has shrugged off all the bearish developments which have disturbed the oil prices for a very long time, according to market experts.
This calendar year, crude oil prices have already surged over 30 per cent in the international as well as domestic markets. On the New York Mercantile Exchange, Brent prices advanced to $49.59 per barrel on May 26 from $36.46 per barrel on December 31 last year.
Brent crude settled down 27 cents, or 0.5 per cent, at $49.32 a barrel on Friday. It rose to $50.51 in the previous session, its highest since early November.
On the domestic front, oil prices have risen by around 35 per cent in the same time frame. According to market experts, the rally in oil prices is a combination of factors arising out of increased optimism that prices may have bottomed out, good economic data from the United States and cut in exploration and capex costs by oil companies.
Sumeet Bagadia, associate director, Choice Broking said, “Crude prices has been surging in last six months mainly on back of multiple factors like constant drop in US crude inventories, estimates that over-supply scenario will stabilise the market by mid 2017, forecast for economic recovery in US and China.”
The International Energy Agency, an energy watchdog for the Western world, said non-OPEC production would fall this year by the most in a generation. Fatih Birol, executive director of the International Energy Agency said low oil prices had cut investment by about 40 per cent in the past two years, with sharp falls in the United States, Canada, Latin America and Russia.
According to the IEA, global oil demand growth for Jan-March 2016 was revised upwards to 1.4 million barrels per day, led higher by strong gains in India, China and, more surprisingly, Russia. For the year as a whole, growth will be around 1.2 million barrels per day (mbpd), with demand reaching 95.9 mbpd.
“In 2016, cuts in global capital expenditures (capex) are expected to continue to be significant, negatively impacting the amount of new oil discoveries. Some $290 billion is estimated to be cut from company’s capex in 2015/2016, according to OPEC (Organization of Petroleum Exporting Countries),” said, Prathamesh Mallya, senior research analyst, non-agri commodities, Angel Commodities Broking.
The OPEC also said that, between 2016 and 2018, the industry is expected to invest around $40 billion per year in exploration, less than half its investments during 2012 to 2014. This clearly indicates that the extra barrel of oil will be difficult and hard to come by in the coming months. Besides, credit rating agency Moody’s has also warned of sustainability of oil producing companies on account of low oil prices.
Oil prices on May 30 edged up in early trading as the peak demand US summer driving season officially kicks off just as its crude production falls to its lowest level since September 2014. US West Texas Intermediate (WTI) crude futures were trading at $49.44 per barrel at 0108 GMT, up 11 cents from their last settlement. International Brent futures were at $49.36 a barrel, up 4 cents.
“Oil prices stayed within touch of $50 per barrel despite news that some Canadian oil sands producers were planning on restarting operations,” ANZ said on Monday.
Oil producer Suncor Energy is planning to ramp up output at its oil sands fields in Alberta this week after it was forced to shut down earlier in May due to massive wildfires. Despite the expected rise in Canadian output, ANZ bank said that WTI price support “still lingers” after the large fall in US oil inventories late last week by 4.2 million barrels to 537 million barrels due to strong demand.
On the further movement, Mallya said, “Price movement in oil markets in the recent weeks suggests that the market has shrugged off all the bearish developments which have disturbed the oil prices for a very long time. The ECB has already boosted the size of the QE programme, the policy decisions by the Central Bank of China to boost growth will prop the demand for crude oil in the coming months supporting oil prices. We expect oil prices in the second half of 2016 to move higher. WTI oil can move higher towards $65 per barrel while Brent can move higher towards $70. MCX oil prices can move higher towards Rs 4,200 per barrel.”
Bagadia said, “Crude oil looks bullish on charts as it has crossed $50 mark on Nymex, immediately it has resistance around $54, a break of which can head towards $60 in next one to two months. We think that present levels are good levels to initiate long position or if there is a small correction of Rs 100 to 150 i.e. levels of Rs 3,250 per barrel in MCX, then one can initiate long position for the immediate target of Rs 3,600 per barrel and then towards Rs 3,900 per barrel in few months.