Business Standard

High supplies to keep oil prices benign

However, overall demand growth in the second quarter might be dampened by the Cyprus crisis and the indications that Asian economies are not growing that fast

Related News

There are two main factors that drive - fundamentals and geopolitical risks. Looking purely at the fundamentals, oil markets are likely to be over-supplied in the near term. Much of this is due to the increases in North American oil production, which is expected to rise by around 800,000 barrles per day (bpd) this year. Despite their recent problems, African supply is expected to rise by at least 100,000 bpd by May, a significant part of that increase coming from Angola and South Sudan.

In the North Sea, where output has dropped significantly in recent years, loadings are expected to recover somewhat in the coming weeks, thanks to increase in oil production and deferrals from previous months. On top of this, physical liquidity in Brent contracts is being boosted by recent changes introduced by Platts, under which additional cargoes of Oseberg and Ekofisk are likely to be delivered into what was essentially a Forties contract.

On the demand side, the situation is less positive than the market was expecting in January. Yes, seasonal demand for crude should rise as refineries in Asia, the US and Europe increase their utilisation rates to stock up aheadof the summer, and demand for oil will also rise in West Asia, as temperatures begin to rise. However, overall demand growth in the second quarter might be dampene d by the and by indications that are not growing as fast as had been expected. Chinese apparent demand fell 3.7 per cent in February versus December's high, while Indian demand for fuel is being compromised by high diesel and gasoline prices, as these products are deregulated. With Japan choosing to continue running its Ohi reactors over the summer months, this reduces potential Japanese demand for crude over the coming months.

In contrast to most other global markets, the supply and demand in the oil market is equilibrated by changes in output by a small cartel of OPEC countries. The question is, therefore, whether the deterioration in supply and demand fundamentals will cause the Organization of the Petroleum Exporting Countries (OPEC) to loosen its grip on prices. Saudi Arabia had indicated last year that it favoured a price range of $100-110/bbl, and after scaling back its output in December, the market took this to infer a preference for the top end of this range. In response to weaker current conditions, the latest pronouncement from Saudi Arabia suggested this week that $100/bbl was a reasonable price for crude.

Ahead of the Iranian elections in June, the tightening of sanctions will further squeeze Iranian exports, potentially pushing these down to 800,000 bpd or less. In the near term, this lack of Iranian crude means Saudi Arabia and the other Gulf Cooperation Council (GCC) countries can easily maintain output at a level that keeps balance in the global market, suggesting that prices will remain within the Saudi target range of $100-110/bbl. If anything, Saudi Arabia is expected to retain, if not increase, its market share of crude oil exports to Asia, which is being challenged by more aggressive pricing from Iraq and is still not subject to OPEC quotas.

All these factors suggest one thing; oil prices will remain relatively weak in the near term. For 2013 as a whole, we forecast Brent to average $109.30/bbl. We also anticipate the Brent-WTI spread will narrow to less than $15/bbl, as US infrastructure expands to take more oil away from Cushing. If there was an early return of Iranian and Syrian oil, we could see Brent prices drop further.

The author is oil markets analyst, Natixis

Read more on:   
|
|
|

Read More

Markets may remain volatile in truncated week: Experts

This week is shortened by two holidays amid expiry of the futures and options derivative contracts

Quick Links

 

Market News

Results to rule stock market amid derivatives expiry this week

HDFC Bank, Cairn India, Maruti Suzuki India, ICICI Bank ACC, Ambuja Cements, and AXIS Bank are among the major companies that will announce ...

MFs garnered Rs 54,000 crore in 2013-14

Industry experts believe that fund mobilisation in mutual fund schemes is expected to grow in the coming months

Bourses cash turnover rises 2.59% to Rs 33.41 lakh cr in FY14

Trading of equity derivatives on the three exchanges surged 20% in 2013-14 from the preceding financial year

Markets end virtually unchanged

The benchmark indices ended the truncated, albeit volatile week of trade, on a listless note.

Dependence on imported edible oil to hit new high

Increase in consumption of oilseeds reduces availability for crushing

Back to Top