Tough time for crude oil investors; upside limited

By: | Published: September 28, 2016 12:47 PM

Crude oil is in news right now with OPEC meeting this week.

Crue OilCrude oil is in news right now with OPEC meeting this week. (Reuters)

Crude oil is in news right now with OPEC meeting this week. Crude Oil is under pressure on back of statement from Saudi Arabia which says there is unlikely to be consensus for production cuts. Adding to that is news that US Federal Reserve is looking to restrict bank involvement in physical commodities. Saudi has said it is willing to make concessions in terms of its oil production, if Iran is willing to participate too. Iran has politely declined of holding its production at 3.6 million barrel per day (bpd). Two OPEC crude producers crushed by domestic conflicts are preparing to increase production to the world at large. They are Libya and Nigeria. Both countries combined are expected to supply additional 8,00,000 barrels a day which will add more woes to already oversupplied crude oil market. Weakening demand both in China and India has also contributed crude oil prices to weaken further in the face of near record output from OPEC producers. The International Energy Agency (IEA) has said, “Supply will continue to outpace demand into 2017.”

Recently crude oil is showing greater sensitivity to economic news. Since last month crude oil gained more than 9 per cent when inventory was declining but now with increasing production from Libya and Nigeria plus expectation of no positive deal this OPEC meeting has made crude oil vulnerable and correcting more than 5 per cent in 2 trading session. This year the US summer seasonal weekly inventory change is now running between the 3- and 5-year averages. However inventories haven’t done anything too out of the ordinary this summer even as US production has decreased. US shale production is expected to remain steady as long as crude is between $40 and $60. If crude breaches $60, then US shale production will increase and it will decrease below $40.

If we look at the production rate of US rigs, definite downtrend is there since last year from March 2015 till March 2016 because of weak crude oil prices. However because of technological advancement, the scenario is that rig counts have decreased by 50 per cent in a year yet the production has only decreased by 12 per cent. The productivity has doubled in a year and any increase in productivity will be a huge threat to crude oil prices in future. Saudi Arabia now no longer controls the oil market, with US increasing its productivity. As per Baker Hughes, the number of active US oil drilling rigs saw another increase this week.

In MCX, Crude oil is trading in range of 200 points. Despite the negative fundamentals, technically crude oil still looks neutral to bullish. Large correction is expected if crude oil breaks below Rs 2850 per barrel. Upside is limited right now to Rs 3,150 per cent. Crude oil is expected to trade in range and any breakout will come above Rs 3,200 or breakdown below Rs 2,850, till then it will be range-bound. Short term support for crude comes at Rs 2945 per barrel which is the trendline drawn from the swing low. It will be frustrating time for traders in crude oil as clear trend will not materialise until crude oil breaks out from the trading range.

(The author is director, Tradebulls)

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