The first half of the year is about to end and its time we assess the crude oil markets, the basic fundamentals of supply and demand, inventories in the US, and major developments in US energy markets as well as from the OPEC nation.

Many forecasts by investment banks at the start of the year were bearish on oil. Swiss bank UBS lowered its 2015 forecasts for Brent to $52.50 a barrel and WTI to $49 a barrel. Goldman Sachs also said in research note that demand growth in China and other emerging economies was set to slow creating a negative impact on oil prices.

Exporters, oil company shareholders and industry suppliers are all contemplating a future of oil at $60 a barrel or below. However, last six months have been a boon for all the participants as WTI and Brent crude oil prices have risen by around 12 per cent and 10.5 per cent respectively, while MCX crude oil has risen by 13.24 per cent. (Both Brent and WTI have been hovering around $60 mark at present).

Ample supplies Traders and investors think what the eventual recovery will look like: slow and drawn out, a rapid rebound, or somewhere in between? They call it the LUV trade – will the future oil price chart be shaped like an L (a sharp fall followed by a prolonged period of lower prices), a U (a sharp fall, a short period of lower prices, before an eventual recovery) or a V (a sharp fall followed by an almost immediate rebound. Let us assess the factors revolving around the commodity and the way forward.

On the supply side, the OPEC nations continue to pump in an average of 30 million barrels per day for last six months while the forecast from the EIA says that total crude oil production in the US will average 9.3 million barrel/day in 2015 and 9.5 million in 2016, which would be the second-highest annual average level of production in US history; the highest was 9.6 million barrel per day in 1970.

Iraq remains the key in the OPEC nation. Despite war against Islamic state (IS), the nation continued to pump record amount of oil in the past three months. This has led to increasing exports from 3.1 million barrels a day to 4 mbpd in an already oversupplied market. For several months since the start of 2015, the Energy Information Administration’s weekly update continues to swell to the most it’s been in at least 80 years. However, not everything is gloomy for oil markets.

Exploration budgets The problem of rising inventory seems to be subsiding now with continuous withdrawal for past consecutive eight weeks in a row signalling strong demand on account of summer driving season. The current crude oil inventories in the US as on June 19 stood at 462.99 million barrels.

On the other hand, the Baker Hughes rig count has dropped to lowest level since 2009. The rig count on June 19 was 857 (dropping for 28th consecutive week). The drop has mainly been because of lower crude oil prices. What about the Cushing oil depot in Oklahoma, wherein it was expected to literally overflow a few months ago? Supplies there plunged 1.9 million barrels (highest since May 2014) to 56.24 MMbbls in the week to June 19. The drawdown in inventories at Cushing is on account of new keystone XL pipeline and the Cushing Market link pipeline.

Greece in focus With the focus on whether Greece will or won’t default on its debts or even stay within the euro zone, the important news of China easing its monetary policy again has been largely sidelined. There is still little to suggest that Chinese commodity import demand is on the verge of a stimulus-led surge rather than the real demand.

Several OPEC producers rely heavily on oil revenues to finance their fiscal budgets. Some producers have already started adjusting their upcoming budgets to reflect the crude oil price decline. If crude oil prices continue to fall or are sustained at a lower level, then oil-dependent producers will have to make tough policy decisions.

The way forward Cut in exploration budgets by oil companies, falling oil rig count in the US will lead to decline in crude production in the months ahead creating supporting crude prices.

Hence, we expect crude oil prices WTI (CMP: $59/bbl) and Brent (CMP: $62/bbl) to rise in the second half of the year towards $68 and $72 a barrel while MCX crude oil prices (CMP: ₹3,765) will rise towards ₹4,400/bbl mark.

The writer is Associate Director - Commodities & Currencies, Angel Commodities Broking Pvt. Ltd. Views are personal.

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