Crude oil sees chequered fortunes in 2016

Refineries have produced so much gasoline in 2016 that supply has exceeded demand.

There are several reasons for crude oil prices reaching a peak of $52, after a consistent rise from the rock-bottom price of 13 years i.e. $26.05 in the first two quarter of the current year. Steady increase in energy demand, decrease in US production and unplanned productions cut in Nigeria and Canada have contributed to the rise in prices.

However, doubt prevails whether this rally would sustain or not. Normally, refineries resort to excessive production to cope with the summer demand for petrol, gas and fire-heating oil by purchasing crude oil and transforming it into refined energy products.

Currently, however, there is a glut of such refined products across the world. Refineries have produced so much gasoline during the current year that supply has exceeded demand, resulting in good news for consumers, but not for bulls.

Crude prices are under pressure from gasoline and the scenario is likely to continue even into the third quarter. If refineries purchase less than expected, crude oil producers will be forced to divert production into storage and, consequently, prices may once again face tremendous pressure.

During July, the International Energy Agency (IEA) said the time has come for the oil market to adopt a re-balancing strategy but the chances of one being implemented seem unlikely for the third quarter of 2016.

The US crude oil stock decreased by 14 million barrels in May but inventories reached the peak of 522 million barrels in the week ending July 22, which is 60 million barrels more than the average of the last five years.

On July 21, the US Energy Information Administration said crude oil supply decreased by 2.5 million barrels in the week ending on July 8 while gasoline supply increased by 1.2 million barrels.

Baker Hughes' rig count of the US said the number of oil drilling rigs increased by six during the week ending on July 15 to be at 357, but these figures were much less as compared to 638 rigs registered during the corresponding period of last year.

During July, gasoline futures declined more than eight per cent and crude oil futures decreased by 10 per cent from their respective peak prices till date. Investors think that ultimately the over-supplied gasoline market has spoiled the game for both producers as well as refineries.

Generally, refiners enter a maintenance mode from September and conventionally purchase less crude oil. Now, suffering from a huge glut, refineries would opt to empty their stock by offering huge discounts.

Even though the third quarter is likely to be weak, it could strengthen the base of the energy market during the fourth quarter as major heating oil demand would emerge due to winter starting in the US. Investors should trade in crude oil futures by taking into account all these fundamentals and technical levels.

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