Crude oil outlook: Maintenance price to drop

Crude oil West Texas Intermediate (WTI) prices have shot up from $92/barrel to $105 since the start of the year, due to a combination of factors such as record low temperature in the US leading to a sharp draw in heating oil stocks, economic recovery in the US and lately crisis in Ukraine.

Oil traders are worried about the situation in Ukraine and it is feared Russia might take over Crimea, resulting in a spike in crude oil prices. We feel the fear is over blown, just like the crisis in Syria last year, which led to a massive spike in prices. It, however, corrected sharply later, when the situation in Syria turned stable. With the ongoing economic downturn, the last thing that Russia would want is economic sanctions by the US and its allies. Therefore, we don't expect any major spike in crude oil prices due to the standoff. Further, supply concerns from Libya continue. However, this will have minuscule impact on prices of WTI crude oil.

On the other hand, we are heading for global refinery maintenance season where demand for crude oil drops sharply as refineries go on planned seasonal maintenance. US refiners are expected to take 1.6 million barrels per day (mbpd) of capacity offline in the month of March 2014. Seasonal low demand across the globe is also expected to keep the oil consumption lower in coming quarter.

Extreme winter weather conditions in the US this winter season have pushed overall oil stocks and distillate stocks lower than 2012 levels. Total crude oil stocks were approximately six per cent lower in February 2014 as compared to the same period in 2013.

Distillate stocks fell almost seven per cent in February on year-on-year basis due to higher fuel consumption driven by extreme cold conditions in the US. However, expectation of easing winter season in the US and seasonally low demand would again lead to built-up in overall stocks of crude oil. Also, slowing heating demand due to milder weather conditions in the

US would push distillate stocks higher, which would add selling pressure on crude oil.

US oil production stood at 8.13 mbpd at the end of 2013, up almost 21 per cent year-on-year, nothing less than extraordinary. This continuous rise in output data confirms the strong production growth in the US. We expect by the end of the year US oil production to hit 8.75-8.9 mbpd, which is also bearish for crude oil. China's slowing economic conditions are also taking a toll on the demand for crude.

The pace of China's oil demand growth appears to be slowing as its economy is struggling with slower growth expected for the rest of the year. In the past four years the major demand growth has come from China, which is slowing down.

This will add further pressure on the prices of crude oil. We don't expect WTI crude oil prices to trade above $105/barrel and it can test levels of $98/barrel. And MCX, we feel with sharp appreciation in the rupee oil prices could test levels of Rs 5,900/barrel in the coming months.
The author is head of commodities research, Nirmal Bang Commodities