Crude Oil - Commodity Update - IIFL

Crude oil futures traded within the price range of US$84-90/bbl during the entire month of November. Geopolitical tensions emanating from the Middle East invited speculative buying, which in fact helped WTI crude oil futures in regaining the lost ground. Effectively, WTI oil prices have rebounded back from the support levels of US$84/bbl. Tensions in the Middle East aggravated, as violence escalated between Israelis and Hamas in Gaza. Concerns that the hostility between Israel and Hamas could affect Middle East crude oil shipments have prompted short covering and fresh buying in oil. However at this juncture, there has been a ceasefire between the two parties. Market participants are also monitoring developments in Egypt, wherein there have been widespread protests against the contentious power seize by the Egyptian President.

Meanwhile, global economic landscape is not encouraging, regardless of a recent improvement in US economic activity. In addition, growth in oil demand remains sluggish. On supply front, oil output levels remain comfortable, as incremental production from Saudi Arabia, Libya, and Iraq is offsetting the anticipated decline in Iranian production, although supply problems from the North Sea oil fields will likely persist through year-end. US crude oil inventories also remain at comfortable levels, substantially higher on yoy basis. On global supply/demand equation, oil markets remain in a surplus of 1.2mbpd during the first eight months of 2012. Comparatively, the same period during last year witnessed a deficit of 0.4mbpd. Global supply during Jan-Oct'12 has grown by 2.7% on yoy basis, while global demand has grown by meager 0.7% respectively.

On Iran nuclear issue, there is an expectation of successful negotiation between Iran and Western powers before this year-end. Such event could adversely impact the Brent prices more than WTI, as Brent prices have unreasonably priced in the geopolitical risk premium that emanates out from the Middle East. Effectively, we also would expect the gap between WTI and Brent to narrow from the prevalent levels of US$23/bbl.

Crude oil prices are expected to trade range bound in the near term, as uncertainty over the fiscal cliff would restrict any substantial upside in the energy complex, wherein lower government spending and higher taxation could hinder the recovery in the world's largest economy. If the fiscal issue remains unresolved, it could translate in some US$7 trillion of tax increases and spending cuts beginning from January 2013 and lasting over next 10 years. The fiscal cliff also implies cutback in defense and non-defense expenditure, end of tax cuts and end of unemployment benefits. It would be interesting to learn how things unfold and whether the US policymakers are able to strike a resolution on the same.

Source : Equity Bulls

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