By Navneet Damani
Crude prices posted their biggest weekly drop in a month on concerns of weakening growth and doubts over whether the OPEC+ coalitions output curbs will counter surging US supply. Crude oil has lost over a third of its value since October in what has become one of the biggest declines since a price collapse in 2014, with surging supply and the spectre of faltering demand scaring off investors.
It joined a selloff in wider financial markets after an interest rate increase by the Federal Reserve and the US government shutdown added to economic uncertainty. On the other hand, investors remain sceptical that cuts agreed by OPEC and its allies are sufficient to avert a looming oil glut.
The broader market turmoil spurred by a plunge in global equities after the US central bank lowered the forecast for 2019 growth to 2.3 per cent from 2.5 per cent in September. While policymakers scaled back the number of rate increases they see next year to two, from three in September, thats still more than what investors expect.
To add to the pressure, President Donald Trump insisted on funding a wall or other barrier along the southern US border as tensions over the government shutdown intensified in the wake of his refusal to sign a stopgap spending bill.
A key aide of US President Donald Trump on Sunday said the partial US government shutdown could enter the New Year, when the new Congress convenes and Democrats take over the House of Representatives.
For the week, API data showed crude inventories rose by 3.5 million barrels compared with expectations of a decrease of 2.4 million barrels. Crude stocks at the Cushing, Oklahoma, and delivery hub rose by 1.1 million barrels. EIA Crude inventories fell by 4,97,000 barrels, much smaller draw than the decrease of 2.4 million barrels that was expected.
The decline was the third consecutive decrease. Distillate stockpiles fell by 4.2 million barrels versus expectations of a 5,73,000 barrels increase. Gasoline stocks rose by 1.8 million barrels compared with expectations for a 1.2 million-barrel gain.
Net US crude imports fell last week by 21,000 bpd. There was a surprise climb in the US rig count where Baker Hughes reported that US energy firms added oil rigs for the first time in the past three weeks. Drillers added 10 oil rigs in the week to December 21, bringing the total count to 883.
EIA in its monthly report stated that oil production from 7 major US shale basins is expected to surpass 8 million bpd by the end of year. When December ends, shale production is expected to climb to 8.03 million bpd for first time on record and forecast to rise by about 1,34,000 bpd in January to 8.17 million bpd.
The largest change for Janis in Permian Basin of Texas and New Mexico, where output is expected to climb by 73,000 bpd to a record of about 3.8 million bpd in January. In North Dakota's Bakken region, shale production is estimated to rise by 18,000 bpd to record 1.46 million bpd.
Driving the sell-off has been sustained by oversupply as the United States has emerged as the worlds biggest crude producer, thanks to the success of its shale industry. The US now pumps 11.6 million bpd of crude, putting it ahead of Saudi Arabia and Russia.
In the midst of all selloff, Saudi Arabian minister confirmed that the global oil inventories would drop by the end of the first quarter next year. On the demand front, Chinese oil refinery throughput in November fell from October, suggesting a fall in oil demand while the country's industrial output rose the least in nearly three years as the economy continued to lose momentum, which can cast a bearish trend over the demand side of crude.
The supportive factor was the Saudis planning to cut production by 3,22,000 barrels a day, compared with a previously announced cut of 2,50,000 barrels a day, for six months starting January. That would bring output in Saudi Arabia, the worlds largest exporter of crude, to no more than 10.311 million barrels a day.
Meanwhile, the Trump administration has given Iraq permission to buy Iranian natural gas without penalty for at least three more months after pledges from Baghdad to buy American oil and energy technology. The decision extends a 45-day waiver Iraq received from US Iran sanctions in November, as the country relies on Iranian natural gas for up to 45 per cent of its electricity needs.
Trading volumes are expected to remain light during the week due to the Christmas holiday as many traders already closed books before the end of the year. In the short term, it doesnt seem oil prices would drop further because WTI has broken the $50 resistance level. Still, the macroeconomic picture and its impact on oil demand continue to pressure prices. Broad consolidation will be seen in the short term. Supports on NYMEX are placed at $42.35 whereas resistance is at $50.
(The writer is VP, Commodity Research, MOFSL.)