Commodity prices are generally down this year, with crude oil leading the pack of non-agricultural commodities. Crude oil has lost its value as an asset, with West Texas Intermediate dropping by 33 per cent and Brent crude by 37 per cent so far this year.

Crude oil prices had surged at the beginning of the year as geo-political tensions lingered following a conflict between Russia and Ukraine, violence in Libyan and unrest in Iraq.

In the second half of this year, expectations of tighter US monetary policy boosted the dollar and, in turn, exerted pressure on crude oil. Apart from these, slow economic growth in the Euro zone, China and other advanced economies too had an impact on crude prices. Ample supplies and low demand have led to sharp drop in prices. Currently, the US is producing 8.5 mbpd (million barrels per day), the highest in the last 28 years. The Organisation of Petroleum Exporting Countries (OPEC) output is also around the 30mbpd limit. Production in Libya – and Iraq, amajor OPEC producer, continues to be high. Currently, Libya’s production has rebounded to 600,000 bpd against its total 1.6 million barrels per day capacity. Iraq also nurses ambitions to increase its output above three million barrels a day it currently produces.

In an era of plentiful supplies, there were expectations that the group might cut output, as the crude price fall has disturbed the cartel’s budget. Before OPEC met last week, its members Iran, Venezuela and Libya called for cuts in production to support prices. Russia, which needs higher prices to support its economy, also tried to force OPEC to slash production, suggesting Moscow could cut its own crude output by about 300,000 barrels a day. However, OPEC surprised the global oil markets with its decision not to cut production despite a supply glut. OPEC is interested in maintaining its market share. Curtailing crude output , price stability and maintaining budgets are the prime objectives of the cartel. Lower prices, on the other hand, could be painful for OPEC members, who depend heavily on revenue from oil.

Crude oil markets have been volatile for the last six months. OPEC’s move to not cut output has changed the dynamics of the industry. Its main aim is to target US shale oil producers, who have added more than one million barrels a day of production in the past year and are on course to continue that rate of expansion.

Oil markets are dominated by ample supplies amidst a slowing Euro zone, China and Japan, the largest crude consuming nations. Actions by central banks to prop up their respective economies might result in gains in the overall economy although the timing remains a million dollar question. For now, crude markets remain in bearish territory.

We see NYMEX WTI (CMP:$67.90/ bbl) crude oil prices drop to $58/ bbl, while MCX crude oil (CMP: ₹4089/bbl) prices can slip to ₹3850/bbl.

The writer is Associate Director-Commodities & Currencies, Angel Commodity Broking. Views are personal.

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