All eyes are on crude oil again. After pausing inside USD 40-55 a barrel for a quite long time, U.S. WTI light crude prices rallied to USD 66 a barrel in late January.
Though a mild correction was seen thereon, the recent geopolitical threat to crude oil output lift prices higher and currently placed near a two-month high.
Oil continued its uptick even after worries about the trade stand-off between US and China which lead global stocks and commodities tumbling down.
The Asian benchmark ICE Brent, traded above USD 70 a barrel, with a premium against the US WTI (light crude). In the domestic market, tracking overseas prices coupled with weak rupee, the most active MCX futures are hovering near its highest level since mid-December 2014.
Rising geopolitical tensions put oil prices under check. Growing concerns over US relation with major oil producers like Iran and Venezuela threatens the market.
Sanctions on Venezuelan oil industry:
Rumors of US moving closer to putting sanctions on Venezuelan oil industry, the world’s largest oil reserves, also aggravate the volatile sector.
As per the latest report from IEA (International Energy Agency), oil output from Venezuela has slid to 1.5 million barrels a day in February, down 60,000 barrels month-on-month and a decline of 540,000 barrels a day against the previous year.
The sharp decline in production is in the wake of the nation’s economic crisis. The country suffers world’s highest inflation. The agency also hinted that without any compensatory output change from other oil producers, the ongoing Venezuelan supply crisis would deepen that dips the oil market into a deficit.
Tensions between Saudi Arabia and Iran:
Increased instability in the Middle East alarming the global oil market. Tensions between Saudi Arabia and Iran have emerged again recently after the Saudi Crown Prince visiting US President considers ending the Iranian Nuclear deal. Intensifying Libyan conflicts also aided to the sentiment.
The recent hawkish comments from the Saudi Arabian Energy minister raising worries over supply from major global producers.
The Saudi minister stated that the OPEC and Non-OPEC countries including Russia need to cooperate together and extend the production cut till 2019 to reduce the global supply glut.
Global oil producers limiting supply:
With a view to rein global excess supply and lift prices, OPEC and other top oil producers including Russia have been limiting daily crude production by 1.8 million barrels since last year.
US Oil Production:
US oil production has been rising for the last several months. Steadily rising oil prices encouraged US shale oil producers to increase output, driving US oil production to record levels.
Burgeoning US production which surpassed 10 million barrels per day, the first time in nearly 50 years recently had hit global oil prices earlier. Starting the year off, US oil production was at 9.5 million barrels per day which rallied to 10.3 million barrels in early March.
Meanwhile, last week’s unexpected drop in US oil inventories raising fears over US production. As per the latest EIA weekly report, crude, gasoline and distillate stocks declined surprisingly as imports dropped and refining rates jumped.
Weak Dollar & Fed:
A weak dollar and reports of higher demand had an impact on oil. Commodity prices weigh on when the dollar strengthens against other currencies.
US Federal Reserve recently hiked their rates and hinted two more cuts in the current year. As per IEA forecast, global oil demand would grow this year. The key consumer US is in transition to summer which kicks gasoline demand into a higher gear in the coming months.
At the same time rising number of US rigs drilling for oil sway prices. The latest report shows that US rig count is at three-year highs, inferring a further increase in production which has already tested 10 million barrels per day.
Looking ahead, the ongoing positive outlook is less likely to prevail unless the looming geopolitical tensions continued. Drop in supply due to restricted production from OPEC and Russia is likely to be balanced by higher US production.
In the meantime, factors like developments on trade war between US and China, intensifying tension in Middle-East and global demand-supply imbalances would set a direction for the oil market later.
On the price side, a choppy trade inside USD 72-55 a barrel is expected in US WTI in the immediate run and breaking either side would suggest a fresh course of action in the commodity.
Investment & trading in securities market is always subjected to market risks, past performance is not a guarantee of future performance.
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