Crude oil has a new normal

The first half of 2016 is done with and crude oil — the lifeline of the global economy — is the third best performer in the entire non-agro commodity space, with returns of around 30.5 per cent in international markets.

On the MCX, the commodity has gained by around 32.5 per cent, as a 2 per cent dip in the rupee supported the rise in the same timeframe. June marked the fourth straight month of an average price rise in Brent and WTI futures.

Both Brent and WTI crude oil touched the $51 mark on June 9, just a week after the OPEC meeting on June 2.

Prices have rallied to the highest point in 2016, stoked by continuing outages in Nigeria and Canada and a steady decline in US oil production.

The combination of a cut by OPEC and non-OPEC countries saw global supply drop by around 4 million barrels per day in June itself.

Sabotage in Nigeria’s oil sector has been a big boost for OPEC nations, who were reluctant to cut oil output, as OPEC’s oil output rose in June to its highest level in recent history, according to a Reuters survey.

In the current context, Nigeria’s output has partially recovered from militant attacks and Iran and Gulf members have boosted supplies. Production in Nigeria has risen to about 1.9 million barrels per day (bpd) from 1.6 million, due to repairs and no major attacks taking place on pipelines in the Delta region.

We are in a situation where the $50 mark has become a new $100 mark for oil and the question now is whether oil markets will rebalance or not in the second half of this year. The answer remains yes. Even in January, when the price of oil fell to its lowest level since November 2003, the oil market re-balanced itself, though a lot of surplus oil would be added to bulging stocks.

On the contrary, US inventories are showing signs of withdrawal. It fell by 2.2 million barrels for the week ending July 1.

Crude inventories have declined for seven consecutive weeks. Overall, crude inventories are down by 18.84 million barrels since the last week of April, indicating that refineries are processing more crude and the incremental demand is kicking in.

In 2016, cuts in global capital expenditure (capex) are expected to continue to be significant, negatively impacting the amount of new oil discoveries. Some $290 billion is estimated to be cut from companies’ capex in 2015/16, according to OPEC (Organization of Petroleum Exporting Countries).

Between 2016 and 2018, the industry is expected to invest around $40 billion per year in exploration, less than half its investments during 2012-14, according to OPEC.

This clearly indicates that the extra barrel of oil will be hard to come by in the coming months. From a three-month perspective, we expect WTI oil prices (CMP: $45/bbl) to move higher, towards $56 while MCX oil prices (CMP: ₹3,007/bbl) can move higher towards ₹3,600.

The writer is Associate Director – Commodities & Currencies Business, Equity Research & Advisory – Angel Broking. Views are personal.