Oil price likely to remain under pressure in 2018

Oil price likely to remain under pressure in 2018

On Monday, oil prices have recorded as much as $49 per barrel on reports of a sharp decline in USA crude inventories in the week that ended last July 7.

The upside for prices, however, will remain capped given that physical markets remain oversupplied and inventories remain elevated.

The Opec's decision to exempt Nigeria and Libya from the output cut only added to the global glut building up in the Rotterdam, Oslo and Singapore spot markets.

Commerzbank's head of commodity analysis wrote in early December that the OPEC production cut would only serve to strengthen the rise in USA production, and he kept his outlook on oil prices unchanged: Weinberg forecast that crude would slide below US$50 this year, which is exactly what is happening right now.

Large companies would understandably be open to talks about a reduction in oil production from shale regions, but smaller, more financially-constrained firms would probably not be able to survive if they underwent a cut in production. In last week, there was an increase of 2 operating rigs in the United States, pushing the total number to 765, the highest since April 2015. "Data so far is showing that the real spike in production only happened in June". EIA forecasts show that U.S. shale oil production is expected to rise further in July. The production has increased by 967,000 barrels per day since bottoming around last July. To put this in perspective, in the downturn of 2015-2016, shale oil output fell from a peak of 5.46 million bpd in March 2015 to a low of 4.75 million bpd in December 2016. Then the oil price slide began-hesitant at first, and then steadier as the months went by. Gasoline demand inched up to 9.78 mbpd from 9.70 mbpd which led to stocks declining by 1.6 million barrels.

Chinese refineries increased crude throughput in June to the second highest on record.

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In June, Libya and Nigeria once again saw the largest increases in oil production, with Libya producing 127,000 barrels per day more in June than in May, and Nigeria producing 96,700 barrels per day more on a month over month basis.

Global oil prices rose to the highest level in almost two weeks after better-than-expected economic data from China boosted demand speculation amid signs that the pace of US production may be slowing.

On the whole, given the selloff in the recent months, we mentioned last week that some short-covering was on the anvil.

In retrospect, the Opec's output cut was not big enough to "shock and awe" the oil bears, especially since Russian Federation pledged to cut output by a mere 300,000 barrels.

Looking ahead, Rs 2,900 is likely to provide immediate support and the short-term bias looks positive above the same.

Buying on dips is thus advised.

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