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8/3/2019 Energy Report - 7th March 2011
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Energy Report - March 7, 2011
Energy Report
Important Highlights
Oil prices hit 2 ½ year high on Libya unrest and worries about supply disruption.
Countries could opt for Strategic Petroleum Reserves if supply concerns rise.
IEA strategic oil stocks total 1,000 days.
US Q1 oil demand outlook cut by 1 percent – EIA.
China’s consumption of oil and oil products to near 460 million tonnes this year.
Crude oil production in India on the rise
Monday, March 07, 2011
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Energy Report - March 7, 2011
Crude oil price movements – Brent and WTI
The surge in crude oil continues unabated with prices touching a fresh
2 ½ year high with each passing day. Crude oil prices have spiraled by
over 20 percent since the start of the year, surpassing the
psychological $100/bbl levels, driven by fears of supply concerns in
the aftermath of the political turmoil in oil producing Libya and fears
of its spread to other oil producing Middle Eastern countries. WTI
prices have on a year-to-date basis, increased by more than 16 percent
to over $106 /bbl (7 March’10) while Brent crude oil rose by nearly 23
percent to over $118/bbl, levels last seen in September 2008.
Although, the ongoing unrest in oil exporting Libya has resulted in
daily output in the region falling by half from 1.6 mn barrels to around 7,00,000-8,00,000 barrel, the shortfall in supply is
being assuaged by Saudi Arabia. The key oil producer who contributes 11.6 percent of global oil has assured oil importers
that it would fill in the shortfall in crude oil supplies and if required draw from its spare capacity of nearly 3.5 million barrels
per day. Saudi Arabia has reportedly increased output to 9 mn barrels per day from its average 8.4 mn barrels per day. This
goes to show that the current rally is largely fear driven and that supply has not been hampered to justify the price rally.
The current situation of high oil prices is viewed by many as a temporary phase and prices would stabilize as the situation in
the political turmoil affected regions normalize.
Supply disruption and strategic oil reserves
Even though concerns abound about the continued rise in oil prices owing to supply disruptions and its impact on some of
the world’s largest energy users, there is a belief that these nations may be able to compensate for the supply shortages by
using oil held in their emergency oil reserves if prices cross threshold levels. Member nations of the International Energy
Agency reportedly have emergency strategic oil reserves totaling 1000 days, equivalent to almost three years of Libyan
crude output. The government of the US, the world’s largest oil consumer, has indicated that it could tap its SPR in a bid to
safeguard economic growth amid a scenario of rising oil prices. The US SPR holds around 727 million barrels of oil, which is
equivalent to around 38 days of consumption. The International Energy Agency (IEA) also said that it could release oil
supplies in an event of severe oil supply disruption. Total oil stocks in the IEA member countries stand at 4.2 billion barrels
as of 2009. This stockpile will be able to satisfy global oil demand for a period of 50 days. IEA director Nobuo Tanaka said
that the agency could release 2.0 million barrels per day for a period of as much as two years. Hence, the upside in oil prices
will be limited further as backup of oil supply by way of IEA stockpiles or US SPR could ease concerns.
Rising spread between Brent and WTI
Although WTI prices too have increased, the quantum of rise in recent
times is far less than that of Brent crude, despite of it being of superior
quality. The recent geo-political tensions in North Africa have had a
greater impact on the Brent variety. During the last three weeks, the
spread between Brent and crude oil has widened sharply- from around
0.9 in January to as high as 19.3 on 15th February, 2011. In 2009 and
2010 (Chart 2), average spread between Brent crude and WTI prices
stood at 0.7 and 0.8 respectively. This spread witnessed a significant
widening since the start of 2011. The year-o-date average alone stands
Chart 1: Crude oil price movement
Chart 2: Spread between Brent and WTI crude oil
$116.85
$104.34
Source: Reuters
Source: Reuters
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Energy Report - March 7, 2011
at 10.3 as against the period between 2004 and 2006 when WTI was trading at a premium to Brent. During September
2008, WTI prices were trading much higher than Brent. WTI traded at a premium of 14.9 on 22nd
September.
The reason for the decline in premium for WTI as compared to Brent is that the latter got support from tightness in the
North Sea. Recently, the premier now commanded by Brent, indicates a structural shift occurring in the oil industry. The key
delivery point of WTI oil contract in Cushing, Oklahoma has been witnessing high inflows which has taken its volumes in
storage to record high (average of 352.72 in 2010), dragging down the premium associated with WTI. In recent times,
Brent crude oil has been receiving support from worries about supply disruptions from the Middle East which would affect
European countries, which is dependent on oil from the region. Crisis in Egypt had also provided an edge to Brent crude
over WTI, as oil prices in the region are closely associated to the Brent contract on the Inter Continental Exchange and on
concerns over disruption in operations at the Suez Canal, a vital waterway for Europe for oil and trade with Asia that could
affect oil deliveries. Cargo operations at Egypt’s Alexandria and Damietta ports had come to a practical standstill due to the
spreading unrest.
Main oil markets affected due to Libya
It holds the largest oil reserves in Africa and is the first OPEC country to be
affected with political turmoil. Libya produces around 1.6 million barrels per
day, which is around 2 percent of world demand. The country holds the 17th
rank among the world oil producers. Concerns in Libya affect the global oil
market more than that of Egypt or Tunisia as Libya is an oil exporter, unlike
Egypt , where only oil passes through the Suez Canal. Tunisia on the other hand
is only a small exporter and concerns there did not have a major impact on the
oil market. Although crude oil prices are rising on the back of escalating worries
in Libya, we feel that the effect is more sentimental than fundamental especially
when we consider only Libya in the picture. Only if the concerns spread to other
oil producing OPEC countries, will the real problem arise. This is because even if
Libya stops producing oil completely, there is still plenty unutilized production
capacity in the other oil exporting countries.
The European region is expected to suffer the most if supply disruptions
from Libya rise (Chart 4). This is because Europe imports around 80
percent of Libya’s oil, whereas the US imports only about 5 percent
(Chart 3). But again, if the impact is only in the short-term then the
current strategic reserves in the Europe and the US are sufficient
enough to meet short-term break in supply. In the US the scenario is far
more comfortable as the country has emergency stockpiles to meet
demand for oil for 38 days of consumption. Additionally, the
commercial inventories in the US remain high and act as a cushion tothe worsening situation in Libya. Surplus capacity in the US is around
4.65 million barrels per day, which is triple of Libya’s production.
Chart 3: Percentage crude oil imported from Libya 2010
Chart 4: Libya’s oil exports by destination 2009
Source: Reuters
Source: Reuters
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Energy Report - March 7, 2011
Domestic Oil Market
Chart 5: Indian crude oil basket vs. Intl Prices
The Indian crude oil basket has risen sharply this year. Geo-political
tension in Egypt boosted prices of Brent crude which accounts for more
than 40 percent in the Indian crude oil basket. Chart 5 shows clearly
that Indian crude oil basket moved in line with rise in international
prices.
India’s crude oil production has been witnessing a steady
increase since the last fiscal. Domestic crude production has risen
11.9 per cent (provisional) during April-January 2010-11, against
a negative (-) 0.1 per cent growth reported during the same
period of 2009-10. January alone recorded an 11.8 percent
growth in output. Consequently oil imports have been on a
decline. The month of December witnessed a sharp decline in oil
imports (Table 1). Domestic Oil production has been rising on
the back of rise in production from Cairn India Ltd’s block in the
western state of Rajasthan.
India produced 3.36 million metric tons of crude oil in December (795,092 barrels a day), 15.8 percent higher than a year
earlier. Output for the month of December exceeded the government’s target of 3.34 million tons, or 789,819 barrels a day.This has been the highest year-on-year growth in crude oil production.
Oil Demand
In its recent forecast, the EIA indicated that global oil demand in the first-quarter of this year is expected to rise by 3 percent
or 2.6 million barrels a day to 88.06 million barrels a day. However, demand outlook for the US was cut by 1 percent i.e.
190,000 barrels a day on the back of sliding revision in demand in major industrialized countries. Demand in China, the
world’s second-largest oil consumer has been revised up by 130,000 barrels a day for the quarter to 9.61 million barrels a
day. Considering the current supply concerns, the EIA estimates came in as a relief as it projects OPEC to raise its oil output
by 400,000 barrels a day this year and by 1.2 million barrels a day in 2012. Commercial stocks held by the OECD nations are
sufficient to cover demand for a period of 60 days.
Soaring oil prices – the biggest economic risk
We feel that a major risk to the global economy currently is the rise in crude oil prices which could hit economic growth.
The advanced economies are back on track of economic growth but rising tensions in the Middle East oil producing
countries could turn out to be a major economic risk. Retail prices of crude oil will rise and set a problem of inflation even in
the emerging and developing economies, which are currently grappling with risks associated with rise in prices. When oil
prices rose above $140/bbl in 2008, the amount of money the world spent on oil was around 5 percent of GDP. If concerns
persist then oil prices could stabilize above $100/bbl levels and this could drag the global economy in another round of
recession.
Table 1: Indian crude oil production vs. oil imports
Source: Reuters
Source: Reuters
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Energy Report - March 7, 2011
Outlook
From the short-term perspective we expect crude oil prices to rise as geo-political issues have led to concerns over supply,
although these are overrated as supply cutback from Libya could be easily offset by Saudi Arabia. On the back of this, we
expect sharp gains in oil prices to be capped as markets become aware of the comfortable supply-side scenario. Even if geo-
political worries spread to other oil producing countries, the supply-side shocks could be brought under check if the IEA
stockpiles are released or if the US government sells from its reserves. Nevertheless, sentiments seem to have more of an
impact on the oil market and investors continue to support the rally in oil on expectations of supply disruptions.
Technical levels and Strategy
Crude Oil Support 1 Support 2 Resistance 1 Resistance 2
MCX March 4600 4350 4900 5200
Nymex 102 98 110 114
Strategy:-
Buy MCX March Crude oil at 4580 to 4600, SL – 4350, Target – 4950.
For Research Queries, please contact:
Reena Walia Nair – Sr. Research Analyst (022)-3935 7600 Ext: 6134 [email protected]
Disclaimer: The information and opinions contained in the document have been compiled from sources believed to be reliable. The company does not
warrant its accuracy, completeness and correctness. The document is not, and should not be construed as an offer to sell or solicitation to buy any
commodities. This document may not be reproduced, distributed or published, in whole or in part, by any recipient hereof for any purpose without
prior permission from “Angel Commodities Broking (P) Ltd”. Your feedback is appreciated on [email protected].
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