Finance Update

Crude oil: Oil is getting ready to sprint, but demand headwinds loom

Oil remains supported by tightening supply, both voluntary (by

Saudi Arabia

) an d forced (by Iran and Venezuela).

Worries about growth and future demand for crude oil continue, but at this stage, the market instead is responding to the continued tightening of supplies.

A broadening global economic slowdown is also putting a dent on oil prices.

On the US-China trade war front, there are signs of progress in high-level talks in Beijing. But the element of uncertainty still clouds the outlook for the global economy, damaging demand for oil.

US markets remained concerned about the economic slowdown and a potential recession. Bearish remarks by the US Federal Reserve sent 10-year treasury yields to the lowest since early 2018.

Adding to the fears of a more widespread global downturn, manufacturing output data from Germany shrank for the third straight month.

Inventory report

Prices rallied after data from EIA showed that US crude oil inventories fell at their fastest rate since July 2018 last week after inventories declined by 9.59 million barrels per day (mbpd) against the expectations of a modest stockpile build of 0.31 mbpd.

EIA also showed that gasoline inventories came off by 4.59 mbpd, nearly twice the expected draw of 2.41 mbpd while distillate stockpiles were down by 4.13 mbpd, compared with forecasts for a decline of 1.09 mbpd.

That brought overall crude inventories, excluding the US Strategic Petroleum Reserve, down to 439.5 Mmbbl, the lowest since January. Net US crude imports fell last week by 6,60,000 bpd, as exports alone rose more than 800,000 bpd, to 3.4 mbpd, near an all-time record.

Iran, Venezuela sanction update

India seems to be negotiating with the US for exemptions from extended sanctions to maintain its current level of crude imports from Iran, but the country is also under pressure from the US administration to halt all oil purchase from Venezuela.

The US is willing to consider such extension in the case of Indian purchase, but administration officials have reportedly made it clear that in such a case, India will have to adhere to US sanctions against Venezuela.

Hence, if any agreement is to be concluded between India and the US, the former will have to make a choice in terms of sourcing crude from either of these oil producing countries.

For Japan, their refiners are unlikely to continue buying Iranian crude from April onwards.

However, Takashi Tsukuoka added they would continue importing Iranian crude if Tokyo agreed on a sanction waiver extension, which it was currently negotiating with Washington.

On the exports front, Iran exports dropped in March to their lowest daily level this year, even before Washington formally requires importing countries to reduce purchases to avoid infringing US sanctions. Shipments are averaging between 1-1.1 mbpd so far this month. That’s lower than February when shipments were at least 1.3 mbpd.

Shale

US energy firms this week reduced the number of oil rigs operating for the fifth week in a row to its lowest in nearly a year as independent producers follow through on plans to cut spending on new drilling. The government has cut its growth forecasts for shale output.

Drillers cut nine oil rigs in the week to March 22, bringing the total count down to 824, the lowest since April 2018. That is the first time the rig count has declined for five weeks in a row since May 2016 when it fell for eight consecutive weeks.

Drilling this year has slowed with the rig count contracting for the past three months as independent exploration and production companies cut spending. They focus on earnings growth instead of increased output, with crude prices projected to decline in 2019 versus 2018.

Conclusion

Prices seem to be supported by the OPEC-led production cuts and the US sanctions against Iran and Venezuela. Concerns over demand continue to slow the rally. The fundamentals of supply and demand in the oil market appear to be heading in a bullish direction.

Hedge funds and other money managers have raised their net long US crude futures and options positions in the latest week as crude futures touched four-month highs. Markets seem to be quite optimistic that negotiators are going line by line through the developing agreement, and that some Chinese officials fear that Trump may walk away from negotiations if he doesn’t like the deal.

However, the market is assuming that if a trade agreement is reached, it could send Brent prices higher to $75 in coming weeks.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of

www.economictimes.com

.)

Source

Prakash Poojary
Business Analyst

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