Crude Oil Monthly Update – June 2012: Weakness Persist

Amidst the global economic uncertainty and uninspiring intrinsic fundamentals, crude oil prices are poised to descend further. Weakening energy demand on the both sides of the Atlantic and subdued economic activity in China has taken a toll on the energy bulls. On supply side, oil output in US has been on a constant rise for the past six months. In this regard, Energy Information Administration reported that U.S. oil production rose to more than 6mbpd for the first time in 14 years in the first quarter of 2012. Meanwhile, EIA estimates that oil production in non-OPEC countries should average 52.72mbpd this year, 120,000bpd higher than the previous estimate. In addition, OPEC output has remained healthy, as escalating production by Saudi Arabia has managed to offset the fall in Iranian oil supply to a large extent. OPEC output was reported at 31.58mbpd, as compared with the output target of 30mbpd. Easing supply and weakening demand has put the global oil markets into substantial surplus during the first five months of this year. In this regard, global oil markets have witnessed a hefty surplus of an average 2.2mbpd during Jan-May’12, as compared with a deficit of 0.3mbpd during the same period last year.

On negotiations over Islamic republic’s nuclear program, Iran and Western nations were unable to come out with concrete solution during a recent meet in Moscow. They have agreed to meet again in Istanbul on July 3rd, to resolve significant differences remain between the two sides. Upside in oil price remains clearly constrained, as markets seem to be inferring a positive end to the negotiations considering the fact that both the parties are keen to resolve their respective differences.

On fundamental front, world oil demand declined by 0.1% during May 2012 on a mom basis, while global supply grew at 0.3%. The average global market balance during the first five months of 2012 stood at a surplus of 2.2mbpd, while the same period during the previous year witnessed a deficit of 0.3mbpd. In US, growth in weekly domestic demand for crude oil grew at 2% during June on a yoy basis. Gasoline demand declined by 5% on yoy basis, while distillate demand increased by 5%. On US supply, crude oil inventories registered an 8% rise on a yoy basis, gasoline stocks are down by 5% and distillate stocks were down by 15%. Downstream, crack spreads have declined both for gasoline and heating oil, which clearly depict dwindling demand for oil products in the world’s largest economy.

Crude oil prices are expected to trade with a downward bias. Ever since the break below US$90/bbl, crude oil prices have been struggling to find support around US$80/bbl levels. On MCX markets, one can build short positions near Rs4,600/bbl with a target of Rs4,300-4,200/bbl and stop loss above Rs4,800/bbl on a daily closing basis.