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    Crude oil tug of war on, US rig count may spoil party

    Synopsis

    Oil prices to remain choppy this week and the dollar will likely provide near-term triggers.

    ET CONTRIBUTORS
    By Harshal Barot

    Crude oil prices rebounded slightly in a choppy week as markets struggled to find a clear direction. The number of US oil rigs increased by seven last week, a fourth consecutive increase. Saudi tried to verbally support oil prices last week by indicating that it is willing to see an undersupplied market.

    US inventory data also provided some support as it reported smaller than expected builds of 1.8 million. US production, however, edged higher to 10.27 mbpd.

    We expect oil prices to remain choppy this week and the dollar will likely provide near-term triggers.

    The latest IEA (International Energy Agency) monthly report provided a bearish outlook for the oil market. The IEA report suggested that the rise in global oil production, led by the US, is likely to outpace demand growth in 2018. The IEA expects US crude output to reach 11 million bpd in 2018.

    1Agencies

    Worries over rising US production have already dented oil prices this month and more evidence of rising output could place a firm cap this year. The EIA (Energy Information Administration) monthly report suggested a revision in US November output to above 10 mbpd. The weekly data last week suggested that output crossed 10.27 mbpd, the highest since 1970. Shale crude production in US is expected to rise in March by 1,11,000 bpd from February to a record 6.76 million bpd. The EIA now projects US production to touch 10.6 mbpd this year and 11.2 mbpd in 2019. This this could offset the OPEC cuts to a large extent and therefore Saudi has been hinting about extending the supply cuts.

    The steep drawdown in US inventories in January provided a lift to WTI at the start of this year. The inventory uptick in the last three weeks, therefore, acted as another negative trigger. US oil stocks rose by 1.8 million barrels last week. Gasoline stocks rose by 3.6 million barrels and distillate stocks fell by 0.4 million barrels. US oil inventories are now 18 per cent lower compared with the same period last year.

    Over the medium term, WTI oil prices will see a base forming around $55 as output cuts by the OPEC may extend beyond 2018. Saudi hinted last week that it was willing to see an undersupplied market. The OPEC review meeting in January suggested that output cuts in some form may remain beyond 2018 although the exact modalities need to be worked out. OPEC output continues to be lower in y/y comparisons and compliance is improving. Estimates suggest that OPEC oil output was largely unchanged at 32.5 mbpd in January and overall compliance touched 138 per cent.

    On the demand side, Chinese imports touched a record 9.57 mbpd in January, nearly 0.4 mbpd higher than the record set in March 2017. Independent refiners in China received quotas that were 55 per cent higher than last year. So, imports could be higher in coming months as well. US refinery demand could however slow over the coming months due to maintenance season kicking in.

    2Agencies

    On balance, while the medium to long term trend still remains positive, oil prices could see further correction in the near term, given that key technical levels have been breached and speculative positions still remain elevated. Technically, on the MCX, the current upside momentum for oil prices could initially continue towards resistance at Rs 4,090-4,120 zone looking possible. However, failure to breach this resistance zone could cap further gains and once again result in a slide towards immediate support at Rs 3,960-3,930 range.

    (Harshal Barot is a Commodities Analyst at Motilal Oswal Commodities Brokers. Views expressed in this article are author's own and do not represent those of ETMarkets.com)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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