Crude counter awaits Opec’s output policy decision

Market volatility coupled with strenghthening dollar have affected the crude price in October, which is expected to regain after meeting

Crude oil prices have fallen by more than 30 per cent from their yearly high levels in early October. Till the issues related to supply glut are left unresolved, bearish sentiments in the crude counter are expected to continue.

Brent crude has corrected from $85 levels in the first week of October to $59.58 per barrel as of last week. West Texas Intermediate crude has fallen from $76 to $51.35 by the end of last week. This has been the worst crash for crude prices since 2015.

The crude oil prices have been moving up in the run-up to the US sanctions on Iran in the anticipation that the US move will lead to a supply crunch in the international market. “But the US government provided waivers to eight to nine countries, including India and China, who are among the largest buyers of Iranian crude. The Opec countries have been increasing output anticipating a shortfall in the market post the sanctions. The US, as always, have been increasing its output and adding to the supply glut. With the waivers, the supply concerns from Iran have been eased and this saw the prices falling by the second week of November,” said Hitesh Jain, vice president, Yes Securities.

The strengthening of the dollar also hit crude oil prices. The dollar generally has an inverse correlation to commodities and the strength in the dollar has been deepening the bearish sentiments in the commodity markets further.

“The dollar is gaining strength due to the divergent monetary policies among the developed economies. While the US Federal Reserve is increasing its interest rates, European Central Bank, Bank of Japan and Bank of England are still following the quantitative easing programme. This has seen international investor money flowing into the US. The volatilities in the emerging markets too have accelerated this flow of funds to the US, thus strengthening the dollar against the basket of leading currencies,” said Jain.

Last week, crude oil prices further weakened as US supply registered record high levels. US commercial inventories rose by 3.6 million barrels in the previous week to 450.49 million barrels, as per the Energy Information Administration. Production remained at a record 11.7 million barrels per day (bpd). Crude reserves also were up 6.4 billion barrels or 19.5 per cent to 39.2 billion barrels at year-end 2017, marginally higher than the previous record of 39 billion barrels set in 1970. The production increase was also reported in Russia and some of the biggest producers in Opec, including Saudi Arabia and Iraq.

The price movement in the crude counter in the near to medium term depends on the decision the leading producers are going to take on production cut. 

Further, in the Opec meeting of December 6 and 7, oil producers will discuss the output policy. If there is a consensus on going for further production cuts, the market would see prices stabilising.