Oil prices are on fire again

oil on the rise
oil on the rise

Crude oil rallied to hit its highest level in three and a half year in the week gone by.

Oil prices has been on a recovery mode since 2016 and interestingly the momentum is still continuing even after worries about the trade stand-off between the U.S. and its allies which send global stocks and commodities tumbling down. The OPEC and other top producers including Russia reducing daily crude output by 1.8 million barrels, supply disruptions owing geopolitical tension, record global demand and positive outlook from analysts and investment banks aided positive momentum oil market.

However, the recovery momentum was a gradual one as the reduction in supplies due to OPEC lead voluntary cut and unplanned supply disruption from Canada, Libya and Venezuela were virtually being balanced by high U.S shale output. Shale oil production is at peak in the U.S, with refineries operating at its highest average capacity utilization rates due to record world-wide demand. Currently, the U.S is the second largest oil producer behind Russia, and their inventories continued to be on a declining trend.

Recently, the OPEC and its allies agreeing to increase the daily production limit in their latest meeting held at Vienna. Against a backdrop of calls from the U.S, China and India for more oil supply to stabilise the market, OPEC decided to raise the output. However, the group failed to announce a clear target for the same. Enhancing the production largely benefited to Saudi Arabia as most of the other member countries are currently pumping oil close to its capacity or losing output due to various reasons.

While the market was prepared for wide swing post-OPEC meeting, the outcome had initially limited impact on price.  However, prices swiftly recovered later with the U.S WTI crude surging to $74 a barrel, its highest level since November 2014. Amidst expectations that proposed hike cannot offset the global supply deficit, the U.S calling out to countries to cut imports from Iran and supply disruptions propelled the rally in crude oil price.

In the meantime, Asian Brent crude oil that was trading on a premium against WTI on concerns over OPEC supply has now revered the trend after OPEC’s decision to hike output. The premium of ICE Brent crude oil over NYMEX WTI was around $11, highest in more than three years, early this month before curling down to $5.

Tracking international prices, domestic crude futures surged to its highest level since September 2014 recently. Apart from the overseas factors, weakening domestic currency against the U.S dollar bolstered crude oil prices in the Indian market. INR touched a record high of Rs 69.09 versus dollar this week.

Looking ahead, increased instability in the Middle East alarming the oil market. Rising geopolitical tensions is putting oil under pressure. Growing concerns over U.S.’ relation with major oil producers like Iran and Venezuela is threatening the market. Reposition of sanctions on Iran is likely to affect top Asian buyers like Japan, South Korea and India. The U.S is demanding all countries to stop buying crude oil from Iran, the third largest exporter of OPEC by November, raising concerns over supply tightness. Threat of trade war between the U.S and its allies may ponder the sentiments as well.

The ongoing positive sentiments largely to extend unless any changes in its key fundaments. Consistency above $72 a barrel may give U.S WTI room for more upsides. Further, trend reversal is expected only on a close below $64.

Posted: June 2018


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