24 th March 2008 Karvy Comtrade s LIGHT SWEET CRUDE OIL Short term Update
Crude prices surpassed the psychological level of $100 and tested a high of $111.80 with funds interest supported by falling dollar and rise in the Geo-political tension in the producing countries. Though, fundamentals generally do not support such high prices, market at present is highly influenced by depreciation of USD and political instability in Middle East. DEMAND AND SUPPLY SITUATION Oil demand has been growing at a constant rate since few decades with rise in demand from Developing countries and China. Since, demand for Oil has been increasing faster than the overall supply levels. Overall supply has not been growing with geo-political tension in the producing region. Unrest in Nigeria has lead to a decline of nearly 25% of country s production in. At the same time, production has been more or less constant in Venezuela with high Government influence. The revenue generated by the oil companies been used for other government spending rather than building plant capacity. 88.00 86.00 84.00 82.00 80.00 78.00 76.00 World Demand/ Supply Comparison MBD 74.00 2003 2004 2005 2006 1Q 2Q 3Q 4Q Total World Supply Total World Demand Source -EIA OPEC supply for the Q4 stood at 35.67 Mbd. In spite of high prices OPEC decided to keep the production targets unchanged in its March 5th, 2008 meeting in Vienna. The OPEC production (including Iraq) in February 2008 was 32.09Mb/d.According to the EIA the OPEC crude oil production is expected to be 0.6 Mbd higher than the figure. The increase in the production mainly reflects higher production from Saudi Arabia, Angola, and the United Arab Emirates. The Non OPEC supplies are also expected to increase mainly contributed by Brazil. Russia is also expected to record net additions to capacity, while the United Kingdom, Mexico, and Norway are among countries expected to experience declines. The Non OPEC supply is subject to delays in the project for capacity additions. However the higher crude oil prices and global economic slowdown might bring down the consumption for the oil and the supply demand difference will be narrowed down. The world consumption is likely to be effected by the US economic condition; however demand is projected to remain intact from the countries like China, India and other Asian countries. Apart from the actual demand-supply, market has been influenced by the few other factors and which is likely to be potential factor in the coming days. Deprecation of USD: The deprecation of USD against major currencies like Euro, JPY, and GBP has supported the dollar priced black metal. Oil prices in terms of USD have increased considerably compared to Euro and JPY.
However, the deprecating of USD makes the crude prices cheaper for importing countries like Japan, China and euro-zone leading to an increased demand. Euro appreciated by 10.07% against the greenback and Yen by 14.53% in 2008. Potential supply disruption: Crude prices in and early 2008 have been highly influenced by potential supply disruption rather than actual supply. The geo-political tension of Turkey-Iraq, Iran s standoff against the western countries on Uranium enrichment, dispute of Exxon Mobil with Venezuela has been supporting the prices. Decline the Distillates stocks in the Heating season: The consumption of heating oil has lead to a decline the Distillates stocks in US. Residential heating oil prices set a record high for the 5th consecutive week during the period ending March 17, 2008. However, the Distillates stocks are now at comfortable level with informal end of the heating season. Total distillates stocks stand at 127.1 Mbl with 118.7 Mbl same time year ago. Distillate inventories are now in the lower half of the average range for this time of year. OVERALL STOCKS LEVEL IN US Overall Stocks of Gasoline, Distillates and Crude oil are at comfortable level in US. Commercial crude oil inventories stands at 311.8 million barrels and are in the middle of the average range for this time of year. Motor gasoline inventories are above the upper limit of the average range of the year and stands at 227.5 million barrel. Weekly US stock levels(thousand barrels) 400000 350000 300000 250000 200000 150000 100000 50000 0 05/01/ 19/01/ 02/02/ 16/02/ 02/03/ 16/03/ 30/03/ 13/04/ 27/04/ 11/05/ 25/05/ 08/06/ 22/06/ 06/07/ 20/07/ 03/08/ 17/08/ 31/08/ 14/09/ 28/09/ 12/10/ 26/10/ 09/11/ 23/11/ 07/12/ 21/12/ 04/01/2008 18/01/2008 01/02/2008 15/02/2008 29/02/2008 14/03/2008 Crude oil Gasoline Distillate Due to the record high prices of gasoline and other petroleum products the growth in consumption is expected at a slower pace. The crude oil production will pick up from the Gulf of Mexico however the production from other states is expected to decline. The total petroleum products and the consumption of liquid fuels averaged around 20.1 million bbl/d in, up by 10,000 bbl/d from 2006. The US petroleum consumption would be increasing marginally keeping in view of the economic growth has been slowing down in 2008 and the use of alternate fuel like ethanol. Current scenario NYMEX crude oil fell from its life time high of $111.80 amid speculation that dollar may recover due to the Fed measures to spur economy growth in the longer term. Most recently, Fed took a decision to cut its key lending
rates by 75 basis points much less than the expected cut of 100 basis points. This decision combined with other Fed actions like cut in discount rate by a quarter basis points, acceptance of more collateral to the loans and gains in equity markets led to the recovery in dollar against the basket of all major currencies. The recovery in dollar increased its attractiveness and thereby reduced the option of commodities as an alternative investment asset. As a result there was a huge decline seen in global commodities including crude oil. Crude oil declined by 11.76% in the last week making a low of $98.65. Outlook In the short term, for Month of April- May market is likely to trade slightly lower with the informal end of heating season. However, prices are likely to gain momentum before the starting of summer driving season in US (Refineries Maintenance programme to meet Gasoline demand). The short term pressure in the prices may be seen with slight recovery of USD after sharp depreciation against major currencies. Technical Outlook Oil prices tested a historic high of $111.80 and witnessed a correction towards 10 Day s EMA level pegged at $98.65 levels. Market is taking good support around $98 levels and breach and a close below the same may see short term correction towards $95 and then towards the trend line support of $92 levels. Resistance is seen at $107 and then $112 levels. Support $98 $95 and $92 Resistance $105 $107 and $112, $115 Short term traders can watch out to sell around $105-$107 range targeting $99 and then $95 with stop loss above $111 levels.
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