Report on crude oil

Crude oil

All the focus is on demand

Fundamental outlook

Global appetite for crude over the next few months remains unclear, expectations are that it will increase by next year, with the International Energy agency predicting a 1.7 percent rebound in demand by next year. Benchmark crude for August delivery was down $1.58 at $58.83 a barrel by afternoon European electronic trading on the New York Mercantile Exchange. It had made a eight month high of $73.28 on june 30, but such a rally wasn’t justified by the oil demand. According to the Paris based IEA the economic recovery in developing countries has increased the demand which was lull due to the great global recession. According to IEA the forecast for 2009 oil demand is unchanged, and it still expects a drop of 2.9 percent.

"If the bulls are going to put up a defense, this is where it will occur," wrote trader and analyst Stephen Schork, in his Schork Report. "If they succeed, then this support will act as a springboard for a second run at $75. If they fail, the path towards a $40-handle will be wide open."

Results over the next few weeks from—— will help investor’s better gauge the strength of the global economy.

The shape of the economy will be measured by the results from the multinational mass market retailers such as Colgate Palmolive, PepsiCo, and Johnson & Johnson

World Oil consumption (World oil consumption is expected to fall with the economic slowdown)

The world’s demand for oil increased sharply in recent years, rising from 78 million barrels per day in 2002 to 86million barrels per day in 2007. However, the global economic slowdown has reversed this trend. According to EIA, this is the first time in nearly three decades that we’ve seen world oil consumption decline. Demand fell by 491,000 barrels per day in 2008 and EIA expects it to fall an additional 1.6 million barrels per day in 2009 before rebounding in 2010 as the world economy recovers. Consumption in OECD countries is projected to decline by nearly 2 million barrels per day in 2009, with significant losses expected in the U.S., Europe and Japan and only slight gains expected in Non-OECD countries. However, EIA projects 2010 will show worldwide gains of 940,000 barrels perday, with modest growth in the U.S., China and other Non-OECD countries.

Surplus crude oil capacity is expected to increase

The amount of surplus crude oil capacity to meet surges in demand or disruptions in supply declined sharply in recent years. Just a few years ago OPEC spare capacity stood at nearly 6 million barrels per day. In 2008, it was less than 2 million barrels per day. This illustrates that until recently tight fundamentals have been at work in the marketplace, increasing the potential for volatility in energy markets.

According to EIA, there is a potential for OPEC surplus production capacity to increase dramatically over the next two years as demand for crude oil falls and production of non-crude liquids increases, and expected capacity expansions come on line in several OPEC countries.

Surplus crude oil capacity matters because there is a direct inverse relationship between the surplus amount and the prices of the crude.

The world oil Demand

The global economic recession was the major reason for the world oil demand to contract below the early 1980’s low of 0.3 mb/d in 2008 and the same is expected in the year 2009 by hefty 1.4mb/d. The rapidly softening fundamentals, with burgeoning stock levels accompanied by a rise in production capacity in OPEC Member Countries has clearly contributed to the drop in oil prices.

The high price levels observed in the middle of 2008 were to a large extent due to significant speculative investment inflows in oil and product futures and over-the-counter (OTC) markets.

Source :http://www.api.org/aboutoilgas/

The GDP of the world economies (A major concern)

The real GDP growth for 2009 in the three OECD regions was expected to be in the range 1.3–1.6%, but by June 2009 the US, the Eurozone and Japanese economies were expected to shrink by 2.8%, 4.2% and 6.4% respectively. Over this period, developing country growth expectations have also been dramatically lowered. Despite some recent data signalling a slowdown in the rate at which economic output is deteriorating and a gradual return of confidence in financial markets, the consensus among macroeconomic forecasters remains that the economic slowdown will be ‘U-shaped’ rather than ‘V shaped’, in other words the recovery will gather momentum only gradually.1 Much rests on the success of the bold monetary and fiscal measures undertaken by governments to restore confidence in the banking sector and to provide stimulus to the economy. Markets, the consensus among macroeconomic forecasters remains that the economic slowdown will be ‘U-shaped’ rather than ‘V shaped’, in other words the recovery will gather momentum only gradually.1 Much rests on the success of the bold monetary and fiscal measures undertaken by governments to restore confidence in the banking sector and to provide stimulus to the economy.

Source :http://www.opec.org/library/world%20oil%20outlook/WorldOilOutlook09.htm

Technical outlook

On Daily charts when we retrace from a high of Rs.3503 to a low of Rs.2500, we see that currently the prices are moving in the retracement level of 50% and 61.8% . Three important things on which we are focusing are RSI, DOJI and SUPPORT LINE. First on DAILY charts RSI is in OVERSOLD zone , so recovery is very much expected. Second, last two days DOJI has been formed which can be taken as BULLISH sign as its in downtrend. Third, long term support line is also in action because prices are taking strong support at those levels. There is Strong RESISTANCE at the level of 2975 which once broken will confirm the DOJI (BULLISH) in downtrend. If prices constantly remain above these level then bulls will come into action. On upper side targets are 3025/3115 till expiry of July contract. It can be said that Low has formed at 2880 levels.