There are unmistakable indications that the relentless rise in crude oil prices — especially seen in February — may be ending at least for the time-being.
On the one hand, major producers represented by OPEC+ adhered to the output cuts agreed upon and the US shale output was impacted by freezing cold.
On the other, demand received a boost with easing of lockdown restrictions. Investors waiting for such an opportunity increased their net long positions in the market.
The current week is expected to be a crucial time for the energy market as OPEC+ is scheduled to meet on Thursday to chalk out the future course of action in terms of the alliance’s strategy.
Already Brent has declined by $3 to $63 a barrel, while WTI has gone below the psychological $60-a-barrel level. In other words, much of the positive news so far has already been priced-in, while supply-demand expectations in the second and third quarters are sure to weigh in on the group’s discussion.
A major trigger for the February rally was lower production by OPEC to the extent of 8,70,000 barrels a day led of Saudi Arabia; but some producers cut production smaller than agreed. There is now expectation that many producers in the alliance would step up production in the months ahead. In the event, nothing can prevent Saudi Arabia to ramp up output. Russia, too, will produce more.
In the event, as much as 1.3 million barrels a day additional oil can come into the market in April. In the US, oil rig count has now crossed 300 and shale output is expected to be ramped up to take advantage of the lucrative prices. Norway, too, is raising its oil output.
At the same time, although improving, demand conditions are still fragile, especially in the western economies. All this will have an unsettling effect on the market. By implication, crude oil prices will be capped to the upside in the short-term. Financial investors holding long positions will, of course, be watching this market for signs that may suggest it’s time to exit.
Any decline in crude oil will be good news for India whose dependence on imported crude is at an alarmingly high 80 per cent. Rising petroleum and diesel prices have fanned inflationary tendencies in the country with hapless consumers the worst sufferers.
Brent crude could trade in the $58-62 a barrel range over the next 2-3 months, on current reckoning, providing a small relief to importing countries.
The author is a policy commentator and commodities market specialist. Views are personal