REPORT | Crude Oil Prices Falling Again: Why They Could Not Sustain Above $50

Oil prices have fallen without a break since June 8 while just a week ago Brent hit the 2016 high of nearly $53 a barrel and WTI reached the $52 mark following a series of supply disruptions, mostly in Nigeria and Canada.

However, if we look at the momentum over the past fortnight, WTI and Brent crude oil traded 1.25 per cent and 1.35 per cent down, respectively, while MCX oil prices declined by half a per cent in the same period.

Brent and WTI had largely traded $3-$5 up or down around the $50 mark for weeks due to uncertainty over oil demand and strong technical resistance for crude above $50. Saudi’s new Energy Minister Khalid al-Falih promised the kingdom would not flood the market with extra output. His remarks suggested a softening in Riyadh’s previous stance, when it rigorously pumped to defend its share of a crude market oversupplied by around 1.5-2.0 million barrels a day. Iran maintained its right to steeply raise crude exports to the pre-sanction levels, although Oil Minister Bijan Zanganeh said he didn’t think others in the OPEC bloc would ramp up supply.

Talking about crude inventories, it fell by 933,000 barrels during the week ending June 10. Overall, crude inventories are down by 11.9 million barrels since the last week of April, indicating that refineries are processing more crude. The latest drawdown in US crude stockpiles offset OPEC’s failure to set a ceiling on its output.

The US Federal Reserve kept interest rates unchanged at its June police review but lowered economic growth forecasts for 2016 and 2017. It still signalled two rate increases this year, which is an indication of slack in the labour market, which in turn acted as a negative for crude oil prices.

With a week to go before Britain votes on leaving the European Union, oil and other markets remain choppy. A so-called Brexit can lead to a Europe-wide recession and can hit demand for oil.

We expect oil prices to trend lower over the next fortnight as it failed to cross the psychological mark of $50 sustainably. WTI oil prices (CMP: $47.33/bbl) can move lower towards the $42 a barrel level and Brent (CMP: $48.26/bbl) towards $43 a barrel. On MCX, oil prices (CMP: Rs 3,184/bbl) can move lower towards Rs 2,800 a barrel level.

Naveen Mathur is Associate Director for Commodities & Currencies Business and Equity Research & Advisory at Angel Broking.