COMMENTARY. Price pressure on crude oil likely to continue

Crude oil prices have been under pressure for a length of time now from both the supply and demand side. This energy commodity is currently trading near a year’s low as market fundamentals have been far from supportive for a move upward. (See BusinessLine, May 25).

The current situation does not favour any marked upside movement in prices. Any chance of a rebound will need really brave slashes on the supply side or sustained demand spikes, both of which appear to be less likely.

According to last week’s report, crude oil stocks declined by over six million barrels, which by itself should be seen as bullish. However, higher US production has considerably offset the sizeable drawdown. Clearly, the US production increases are seen frustrating the efforts of many producers worldwide who are working in tandem to boost prices by curtailing production.

Every increase in crude price, especially through supply cuts by major OPEC and non-OPEC producers, will be to the advantage of US shale producers who respond with higher output. The rig count in the US has been rising and is currently at 763.

On the other hand, the production cut agreed to by large producers under the lead of Saudi Arabia and Russia has not had the desired price impact. Now, most market analysts are convinced that producers have to come to a consensus and agree to additional cuts in order to provide lasting support to prices.

However, this seems difficult on current reckoning. Every producer is fighting for market share. Libya and Nigeria are actually ramping up their output as they are exempt from output curbs. On the other hand, Russia, a large producer, does not favour additional cuts. That makes others reluctant to offer cuts. Lack of consensus means that the current market fundamentals underpinned by supply and inventory overhang will continue to drive prices.

Given this picture, speculative capital is slowly moving out as the longs gradually liquidate their position on the bourses. The Fed rate hike has made the US dollar so much more expensive and tightening dollar availability does not bode well.

Consumer-friendly energy prices and positive macro data from emerging markets can potentially reward the bulls, but may happen in the last quarter of the year. In the short term, given the bearish sentiment, prices have the potential to lose anything between $2 and $3 a barrel.

An unintended consequence of the softening of the crude oil market is seen on vegetable oils through the bio-diesel route. Discretionary blending has all but disappeared. Even mandatory blending programmes in countries such as Indonesia are not performing as projected earlier. No wonder global vegetable oil prices have sharply corrected down.

For palm oil, seasonal factors have also come into play. The ongoing peak production season has seen output rise and inventory build up. The price situation wil only worsen for producers. In this market too, both Indonesia and Malaysia are fighting to retain market share.

In a sense, both the crude and vegetable oil markets are moving in tandem.

The writer is commodities market and agribusiness specialist. Views are personal

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