Oil outlook bleak, gas prices to be firm

While some solid moves were witnessed in crude oil at the end of 2013, so far during the year the commodity is under pressure, weighed down by a feeble global demand outlook. Tapering of the US economic stimulus programme and concerns over the growth outlook of emerging countries are influencing prices. In the domestic market, the trend was not so different but a weak currency provided lower-level support. Meanwhile, frigid winter temperature across the US have escalated heating demand for natural gas and lifted prices to multi-year peaks.

Crude oil
Crude oil in NYMEX futures started the year at $99 a barrel but dipped to $91.24 by mid-January and is currently trading again near $98. Meanwhile, Brent crude oil prices held above $106 a barrel, with its premium to US WTI crude continuing to narrow with the severe cold climate in the US.

Growth outlook
Turmoil across the emerging markets surpassed the solid fourth quarter economic growth report in the US. The US Federal Reserve's decision to narrow its monthly bond buying programme had raised concerns over global growth outlook, which swayed oil prices. Even strong economic data and reports of high demand for heating oil across the US, the world's top energy consumer, have failed to dominate the prices. The US gross domestic product (GDP) expanded to 3.2 per cent in the previous quarter and exports escalated by 11.4 per cent. At the same time, weak economic releases from China attracted fewer demand prospects from the country, weighing down on the prices. Chinese manufacturing data declined in January, the first time in six months and the Purchasing Managers' Index declined to 49.5, raising questions over the enocomy's growth prospects.

Uncertainties and demand-supply
During the previous year, political uncertainties in West Asia raised worry over crude oil shipments and had escalated prices. The Organization of the Petroleum Exporting Countries' output surged in January from a two and a half year low, hit last January, due to partial recovery in Libyan supply and higher supply from key producers Iraq and Iran. Now, developments between Syria and the Organisation for the Prohibition of Chemical Weapons will be vigilantly observed, as geopolitical tensions in oil producing countries always have a strong impact on oil prices. Recently, Syria missed the deadline to hand over all toxic materials to the OPCW, making the situation uncertain.

Natural gas
Gas peaked to $5.73 a million British thermal units on the NYMEX recently, the highest in three years. Its domestic counterpart, MCX natural gas, has peaked to levels earlier seen in November 2008. The US climate hit prices broadly. Cold temperatures lifted gas demand at thermal power plants as homes and businesses consumed more energy for heating. The frigid winter temperate escalated demand for the commodity and shrunk the inventory levels sharply, almost 40 per cent since November. However, enduring positive sentiments in the commodity are likely to extend till the end of the winter heating season in March.

Looking ahead, NYMEX crude oil is likely to stay in a tight range of $88-100 a barrel, as the demand outlook seems bleak. The growth rate of emerging countries, US and Chinese economic data, the output levels of countries and geopolitical tensions between countries are possible factors determining prices in the immediate run. In the domestic market, mild up-moves might be seen towards Rs 6,500 a barrel in the MCX as the weak rupee probably provides firm support. Anticipate gas prices to stay firm until March as the recent string of powerful winter storms attract more demand for the commodity. MCX gas would possibly stay near Rs 260-320; in the NYMEX, it might vary between $5.5 and $4.2 a million British thermal units.

The author is whole time director, Geojit Comtrade Ltd