‘US crude may hit $54/bbl in short term; watch out for OPEC, IEA reports’

Crude prices last week posted their biggest weekly gain in six months due to data showing output declines among major oil producers and a weekly fall in US crude inventories. The bias turned positive after news of a possible resolution to the US-China trade dispute.

Although no concrete agreement was reached after three-day of mid-level discussions between US and Chinese officials, the positive outcome resulted in the two economic powerhouses agreeing to higher-level talks later in the month. The weakness in the US dollar this week despite Powell’s comments reiterating that the Fed would be patient and prepared with flexible policy supported the prices.

On the other hand, the talks of slowdown in global economy after news that China plans to set a lower economic growth target of 6-6.5 percent in 2019 compared with last year’s target of around 6.5 percent dampened the positive bias and kept pressure on prices.

Meanwhile, data from China showed that country’s December exports fell 4.4 percent from a year earlier, the biggest monthly drop in two years, pointing to further weakening in the world’s second-largest economy. Imports also contracted, falling 7.6 percent, the biggest decline since July 2016.

On the supply side, oil markets are receiving support from supply cuts led by OPEC and aimed at reining in a glut that emerged in the second half of 2018. Lower oil exports from Iran since November, when US sanctions against it resumed, have also supported crude.

Inventory report

For the week, EIA reported that crude inventories fell by 1.7 million barrels compared with expectations for a decrease of 2.8 million barrels. The huge build up in distillate and gasoline kept prices under pressure. Distillate stockpiles rose 10.6 million barrels, more than five times the expected 1.9 million-barrel increase.

Gasoline stocks rose 8.1 million barrels, the largest weekly rise since December of 2016 against the forecast a 3.4 million-barrel gain. Net US crude imports rose last week by 6,26,000 bpd while crude production was steady at 11.7 million bpd.

The data from API reported a sizable crude oil inventory draw of 6.127 million barrels, compared to expectations that we would see a smaller draw in crude oil inventories of 3.3 million barrels. For driller’s data, US energy firms cut oil rigs for a second week in a row as more producers, like Occidental Petroleum Corp, turned conservative in their 2019 drilling plans due to uncertainty over a recovery in crude prices. Drillers cut four oil rigs, bringing the total count down to 873.

OPEC Efforts

Saudi Arabia reported it would slash its oil exports by 8,00,000 barrels per day in January and promised further cuts as producers move to shore up tumbling prices. Energy Minister Khalid al-Falih said Saudi would cut its exports to 7.2 million barrels per day (bpd) in January, down from 8.0 million bpd in November. He also announced a further 1,00,000 bpd cut in February. This brought back the positive bias regarding OPEC capacity to bring balance in the markets.

For Russia, it has assured the markets that it would cut production by 50,000 to 60,000 barrels a day in January. The preliminary data shows that the nation’s output has already fallen by more than 30,000 bpd relative to October levels and is gradually reducing oil production in line with the OPEC+ deal and is on track to get about a fifth of the way toward its pledged cut this month.

Outlook

Oil traders will continue to monitor global crude supplies and the outlook for energy demand in the week ahead. In the short term, we maintain positive bias for crude oil with WTI touching levels of $54 for the week ahead.

Market players will also focus on monthly reports from OPEC and the IEA this week to assess global oil supply and demand levels. Markets await the result of the next meeting of the Joint Ministerial Monitoring Committee, which oversees implementation of the production cuts, may take place in April.

Technically speaking, MCX Crude oil traded with positive bias in the past two weeks and is signifying further strength in price. The RSI has reversed from its oversold zone and going ahead, possible crossover of MACD will confirm further strength in price.

Immediate resistance is capped at Rs 3,725 per barrel and price sustained break above the same will lead the rally towards Rs 3,875 – 4,000. Short-term supports are placed at Rs 3,480 – 3,370 levels. Buying on dip near support or above resistance is advised.
Source: Money Control