Crude oil has been a talk of the town owing to sharp volatility seen in price this year and it seems the trend is not likely to subside soon enough. Crude oil hit a high of $51 per barrel in June but witnessed a huge sell-off to hit a low of near $39 per barrel but start of August. The sharp drop in crude price put it technically in a bear territory and there were increased talks about huge oversupply in global market.
However, to market’s surprise, crude staged a 20 per cent plus rally in less than 10 trading sessions and hit a high above $48 per barrel by mid-August. The rally has put crude back in bullish territory and market players are now talking about reduced supply. The sharp slump in crude price in last few years has been due to excess supply in global market and this has made crude price most vulnerable to supply side news. Global market remains well supplied and it will be months before the market will rebalance.
In last few days, there have been increased talks that OPEC and some other oil producers will meet in September to discuss ways to stabilise oil prices. Oil producers have held similar such meeting in April this year but failed to reach a consensus on freezing their production. Crude oil has witnessed a sharp rise in last few days but we may not see the rally sustaining as any consensus amongst OPEC members on production cut is highly unlikely. The sharp rise in price is also likely to rekindle talks about revival in US crude production.
Crude’s rise could also be challenged by higher global crude and product stocks and nearing end of high demand US summer driving season. We expect crude to trade in a range of $46-51.5 per barrel but the current rally may not sustain and some correction is likely.
(The author is analyst at Kotak Commodities)