Crude oil may continue to trade with bearish bias where support is seen near Rs2,480 per barrel and resistance is seen near Rs2,660/bbl. Crude oil on MCX was trading at Rs2,609/bbl on Monday (November 2, 2020). Oil prices slumped more than four per cent on Monday to the lowest levels since May on worries a swathe of coronavirus lockdowns across Europe will weaken fuel demand, while traders braced for turbulence during the US Presidential election week. Countries across Europe have reimposed lockdown measures aimed at slowing Covid-19 infection rates, which have accelerated in the continent in the past month. Concerns about weakening demand and rising supplies caused oil prices to fall for a second straight month in October, with WTI falling 11 per cent and Brent 8.5 per cent. Rising supplies from Libya and Iraq, members of the Organization of the Petroleum Exporting Countries (OPEC) offset production cuts by other members and caused the group’s output to rise for a fourth month in October, a Reuters survey showed. OPEC and their allies including Russia, a group known as OPEC+, are cutting output by about 7.7 million barrels per day in a pact aimed at supporting prices. Natural gas may trade with higher volatility and may extend the bullish rally where resistance is seen near 251 and support near 243. Natural gas futures closed higher last week, helped by relatively strong liquefied natural gas (LNG) demand, limited production and a smaller than expected government storage number.
Crude Oil may trade in the range with weak bias as global demand remained below pre-Ccovid levels while US production edged up. Both Brent and WTI benchmarks could see headwinds in October as the latest news from the pandemic front is unlikely to give much hope to those waiting for a price recovery. With a second wave of Covid-19 raging across Europe and US cases continuing to rise, most are preparing for a long wait until prices rebound. Oil prices may further bearish as US producers began restoring output after Hurricane Delta weakened. In the United States, Hurricane Delta, which dealt the greatest blow to US offshore Gulf of Mexico energy production in 15 years, was downgraded. However, the prices may get support if new hurricane emerge and hit to Mexico gulf. Renewed optimism over some US coronavirus relief aid is also supporting the market. After shutting down talks over a larger stimulus deal, President Donald Trump wrote on Twitter Congress should pass money for airlines, small businesses and stimulus cheques for individuals, fuelling hopes for some relief. The fate of oil prices will also depend on growth of oil demand is China and India as economic activity in both the Asian hub started recovering from pandemic hit.
Fuel demand in India
India's fuel demand in October rose as unlock is in place. The demand for energy in September rose for the first time since June as easing coronavirus restrictions supported economic activity and travel, but consumption remained weaker than a year earlier, government data showed. Consumption of refined fuels, a proxy for oil demand, rose 7.2 per cent in September from the prior month to 15.47 million tonnes, the first monthly increase since June when demand rose to 16.09 million tonnes. However, demand fell 4.4 per cent from the same period a year earlier, posting its seventh consecutive year-on-year slide, data from the Petroleum Planning and Analysis Cell (PPAC) of the Ministry of Petroleum & Natural Gas showed.
In September, natural gas (NG) futures lost more than 13 per cent, but in October recovered as they're trading on MCX at Rs254.90 per mmBtu on November 2, 2020. Lower natural gas spot prices reflected declining demand for natural gas from the US electric power sector as a result of cooler-than-normal temperatures during the second half of September and relatively low demand for US liquefied natural gas (LNG) exports amid hurricane-related activity in the Gulf of Mexico. The fall in the GDP in the recent quarter also contributed to the fall in the price of the commodity in the recent month. In September, the Henry Hub natural gas spot price averaged $1.92 per million British thermal units (MMBtu), down from an average of $2.30/MMBtu in August.
Natural gas prices are expected to remain firm and thus buy at dip should be a good strategy for this commodity. Exports are rising and temperatures expected to remain warmer-than-normal through October. The combination of feed gas demand and the return of colder temperatures later in the month will be bullish for natural gas because it will help alleviate storage issues before the winter heating season officially begins. But profit booking at higher level can't be denied as industrial consumption takes a back seat. The consumption of natural gas in the US industrial sector declined from 25.4 billion cubic feet per day (Bcf/d) in January 2020 to 20.1 Bcf/d in June 2020, according to the US Energy Information Administration’s Natural Gas Monthly.
As per the October Short-Term Energy Outlook (STEO) of EIA, reduced economic activity related to the COVID-19 pandemic has caused changes in energy demand and supply patterns in 2020. This STEO assumes US gross domestic product (GDP) declined by 4.4 per cent in the first half of 2020 from the same period a year ago. It assumes that GDP will rise beginning in the third quarter of 2020, and will grow 3.5% year-over-year in 2021.
Rising Oil Import By China
China’s crude oil imports averaged 11.52 million barrels per day (bpd) in September, up by 3.1 percent from August, but slowly returning to historical levels and starting to ease the congestion at Chinese ports. Compared to September 2019, Chinese crude oil imports jumped by 24.4 percent, or by 2.26 million bpd. China’s oil imports continue to grow compared with previous years, but they are easing off the record-highs seen earlier this summer when Chinese refiners imported cheap barrels they had snapped up in April at the lowest prices in decades. China imported record volumes of crude oil in May and June, as the oil-hungry nation attempted to benefit from the low oil prices in April.
Production Hike by Opec +
Saudi Arabia is considering the cancellation of plans for the Organization of the Petroleum Exporting Countries (Opec) to raise oil production early next year. The rise in Covid-19 cases in many parts of the world, as well as the expected return of Libyan crude oil to the world market for rethinking the plan, which calls for a gradual increase in output, as Opec and its allies, collectively known as OPEC+, ease production curbs. OPEC+ had agreed to cut overall oil output by 9.7 million barrels per day starting in May. The group tapered the cuts starting in August to 7.7 million barrels per day. Opec's next official meetings will be held on November 30 and December 1. Production in Libya, one of the members of the Opec, is expected to rise to 355,000 barrels per day after force majeure was lifted on the Sharara field. This would not be 'helping OPEC+ in the task of rebalancing the market.'
The writers are senior research analysts (commodities) at SMC Global Securities Ltd