Oil prices witnessed big swings last week as the initial selloff reversed after the unexpected outage at the Forties pipeline. The supply reduction in global oil market was exacerbated in light of the ongoing Opec deal as well.
The Opec and IEA monthly reports, however, offered a diverging picture with Opec remaining optimistic about 2018, while the IEA expects a slow rebalancing. On the whole, while the trend remains positive, the upside will continue to be capped as the North Sea outage is likely to be temporary.
Oil prices were correcting for the early part of last week, as the optimism after the Opec deal started to fade and speculators looked to book profits.
Prices, however, saw a sharp reversal after an unexpected shutdown at North Sea’s most important oil pipeline. The pipeline system shifts almost 40 per cent of the UK North Sea oil and gas production, carrying around 450,000 barrels a day of Forties crude. While the outage may last for several weeks, prices have largely discounted that factor.
The other important trigger for the oil markets came from the IEA and Opec monthly reports. Their views offered a contrast about the market outlook in 2018. The IEA expects an oil surplus of 200,000 bpd in the first half of 2018 before the market sees a deficit of 200,000 bpd in the second half. It expects US oil production to rise by 870,000 bpd in 2018. Total Non-Opec output will expand by 1.6 mbpd during 2018. It maintained its demand forecast of 1.3 mbpd for next year. The Opec on the other hand estimates non-Opec growth at 990,000 bpd next year. Opec expects US output growth in 2018 by 180,000 bpd to 1.05 mbpd. It also expects demand to grow faster at 1.5 mbpd compared to IEA.
On the whole, the US production remains a wild card for the market, as the extent of increase in shale output would depend on the level of oil prices. At current prices, shale output would continue to steadily increase and cap the upside for global oil prices. US output stands at a record 9.78 mbpd and could easily surpass 10.0 mbpd next year.
Overall, Opec output, however, continues to drop and compliance is improving. Estimates suggest that Opec oil output fell by 300,000 bpd to 32.48 mbpd in November and overall compliance touched 112 per cent.
Angola’s output dropped by 100,000 bpd and exports fell to a 13-month low. Saudi continues to be the biggest contributor to the supply cuts, but the drop in Iraq’s output helped improve the overall compliance. Nigerian output slipped by 40,000 bpd as some of its exports were under force majeure while Libya production dropped by 30,000 bpd due to protests.
The Opec’s commitment to supply cuts this year coupled with robust demand has led to a drawdown in inventories globally and has resulted in tightening market balances.
With the extension of the deal, effectively, oil supply amounting to 1.8 million bpd will stay off markets for another year and help rebalance global oil markets. A nine-month extension of deal was largely factored into price but fact that Libya and Nigeria have informally agreed to cap output at 2017 highs will provide additional boost to prices over medium term.
On the inventory side, US oil inventories fell by 5.1 million barrels last week but gasoline stocks continue to rise. Gasoline inventories have increased for five consecutive weeks while distillate stocks fell after three weeks of increase. ARA product stocks are 4.9 per cent lower compared to last year after a drawdown last week.
OECD commercial oil stockpiles meanwhile fell 40.3m barrels in October to 2.9 billion barrels, their lowest level since July 2015. They are now 111m barrels above the five-year average.
Crude oil prices are likely to remain flat as market lacks decisive triggers towards the end of this year. US rig count unexpectedly fell last week for the first time in six weeks despite rising oil chlorine factory prices. The number of oil rigs fell by 4 to 747.
Oil prices, however, have been on an uptrend after the Forties pipeline outage in North Sea and ongoing Opec led production cuts. Last week, the IEA reported that global oil market is likely to show surplus in first half of 2018, as rising US supply offsets Opec’s discipline in maintaining its production cuts for whole of next year.
IEA left its forecast for global oil demand growth unchanged for 2017 at 1.5 million bpd and for 2018 at 1.3 million bpd. OECD commercial oil stocks fell 40.3 million barrels in October to 2.94 billion, 111 million barrels above the above 5-yr average.
On the whole, while the trend for oil prices remains positive, the upside will likely remain capped for WTI at $60-62.
On the MCX, crude oil traded choppily last week, swinging between support near Rs 3,600 and resistance at Rs 3,770-3,780 area to close slightly lower for the period near Rs 3,670, forming a ‘Long-legged Doji (neutral candle) on the weekly chart.
Looking ahead, the upside looks capped near Rs 3,780-3,800 zone and failure to breach the same could turn the short-term bias lower.
Sustained breach of Rs 3,600 could trigger a correction towards Rs 3,530-3,500 zone. However, the medium-term bias still looks positive and dips could be used for buying later on.
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