By DK Aggarwal
For global economy, nothing is more political as well as significant than
, which contributes majorly to the cost of productions. That’s why we call it ‘lifeblood of economy’.
The commodity’s price has seen massive volatility, especially since the beginning of 2000. In 2000 a bull rally started from $25 a barrel and saw the peak of $147 in 2008 — a multifold rise.
2008 was the year of subprime loan crisis and prices fell like nine pin and touched a low of $32 per barrel. People learned their lesson and since then hedging activities increased and futures role have widened significantly.
Major airlines and manufacturing companies are involved in hedging to minimise their losses. Even in the past few years, prices saw wild swings.
In 2018, prices saw major jump on historic decision of Opec plus Russia to cut 1.2 million barrels supply form the market to balance demand-supply situation.
On one hand Opec plus opted for a production cut, on the other hand, the US saw historic shale oil production growth. Prices reacted accordingly. In the first half, crude saw massive jump and in the second half, especially in the fourth quarter, prices saw record low on US-China trade war amid US production rise and closed the year near $45 per barrel.
In 2019, we have seen that it is one of the top performers, giving upside of more than 30 per cent.
Hedge funds and money managers raised bullish wagers on the US crude to the highest in more than five months. Reasons behind the jump was stable growth amid Opec plus production cut. Even they rescheduled in Vienna with the notion that they continue these cuts up till June. Further decision will be taken in the next meeting only.
In between they give indications that they want prices near $70. Gradually prices of WTI are moving towards this level. Some factors such as rigid Trump administration sanctions on Venezuelan and Iranian oil and a virtually easy money regime in the US assured by a Federal Reserve determined not to hike interest rates are keeping prices in the upward territory.
The surprising fact is that Saudi-Russia partnership in oil supply management has been very successful since 2016. Earlier Saudi had strong trade relation with the US. The market has lost an additional 100,000 bpd due to US sanctions on Venezuela. Additionally, the number of US oil rigs operating to the lowest level in nearly a year, cutting the most rigs during one quarter in three years; signalling a comparatively a tighter supply ahead.
WTI crude prices may touch $70-75, though near this level, we may see a breather in rally, as it is overheated and overstretched. Some factors are also advocating cautious approach. Smooth supply side in the US and Iran, impact of US and China trade war may reflect in second half of 2019.
Global demand for crude grew more slowly than anticipated. It has increased only by 1.6 per cent in 2017 and 1.3 per cent in 2018, according to the International Energy Administration.
The IMF has revised the world GDP on lower side. On lower side, $45-50 is a very strong support zone. Current volatility suggests that hedging in futures should be properly done.
(DK Aggarwal is Chairman & Managing Director of SMC Investments & Advisors)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of