Crude shows volatility with dollar weakness

dubai - Improvement in supply from some oil-producing nations also weighed price change

Nymex crude oil is hovering near $50 per barrel for the past few weeks. A mixed trend with extreme volatility can be seen on the price due to several reasons, including the decline in US crude stocks, demand concerns amid mixed economic data from major economies, the Opec's inaction regarding production and signs of improvement in US crude production.
An improvement in supply from some oil-producing nations also weighed on the price change. The market focus now remains on the Fed's monetary policy. US economic outlook will affect the possibility of the Fed's rate hike and thereby result in the US dollar weakening. Being the largest consumer of crude, the US will see its demand of oil shift based on its economic outlook. Also in focus will be the US Energy Information Administration's monthly outlook and weekly inventory report and development in oil-producing nations.

Crude oil witnessed a sharp rally in the last few months amid a spate of supply disruptions that fuelled tightening concerns. Wildfires in Canada and militant activity in Libya and Nigeria affected supply from these regions. The supply situation is however improving as Canadian producers are trying to restart operations and Libyan suppliers continue to raise production even as militant activity remains a concern. Nigerian supply, however, continues to dwindle. Supply outages in oil-producing states have offset increased production in Iran and other Gulf nations, keeping Opec crude production largely steady. Unless a major supply disruption occurs, prices may correct. Canadian supply will also affect imports into the US and, thereby, US supply.

Apart from these temporary supply outages, tightness concerns also rose amid falling US crude production. US crude production has fallen for the last 12 weeks and stands at its lowest level since September 2014 and is expected to fall further this month. However, a rise in rig count shows renewed buying interest near $50 per barrel. The number of rigs drilling for crude rose by nine to 325 rigs, the first rise in 11 weeks and second this year. We have to wait and see whether the rise is temporary or will extend further. US crude stocks remain well above five-year average levels although stocks have declined in the last few days. However, an increase is expected during the summer driving season, which will be highlighted in the EIA's coming weekly inventory report.

Opec members met last week to discuss production policy with some suggesting that a production ceiling could be imposed. Opec members however once again failed to reach a consensus and no decision was taken. Saudi Arabia assured market players that they will not shock markets with a huge supply. Overall, the Opec's stance showed that they will not take any measures to correct oversupply in the global market, putting the onus on the US and other non-Opec nations. Mixed economic data from major economies also dented demand outlook for crude and other commodities with the focus remaining on the US and China.

Speculative positions
Crude oil steadied after hovering near $50 per barrel as speculators cut net long position for the second consecutive week. As per the US Commodity Futures Trading Commission report for the week ending May 31, non-commercial traders for crude futures cut long and short positions by 1.1 per cent and 2.5 per cent, respectively. Net long position fell by 0.3 per cent to 347,002 contracts. Net long position hit the highest level since July 2014 two weeks back and we are seeing some correction.

We may see some further decline as crude price may remain pressurised by demand concerns. Gasoline speculators cut net long position amid position squaring with the onset of a high-demand summer driving season. Gasoline stocks fell more than expectations last week. Even though demand is expected to pick up, prices have already risen too much. Heating oil speculators further raised net long position as stock declines lent support to prices.

The EIA's weekly report noted a smaller-than-expected 1.366 million-barrel decline in US crude stocks. Crude production has been declining as lower prices affected rig activity. US crude rig count tested the lowest level since 2009.

The writer is manager of commodities market at Emirates NBD Securities. Views expressed are his own and do not reflect the newspaper's policy.