Posts Tagged ‘OPEC’

Weekly Update 18th – 22nd October 2010

Most of the world markets rallied in the week gone by on the buzz of further quantitative easing by U.S. Without giving details about the strategies on how the central bank will act its Nov. 2-3 meeting, Federal Reserve Chairman Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.

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Fed is considering ways for raising inflation expectations to encourage people to believe that prices will start rising at a faster pace so that they would spend more of their money now. Retail sales in U.S.climbed more than forecast as purchases rose 0.6 percent following a 0.7 percent gain in August and manufacturing in the New York region expanded in October at a faster pace than anticipated.

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China’s Shanghai Composite Index saw gains of 8.5 percent on the anticipation that China’s banks show strong earnings growth this quarter as the lending has beaten the forecast. Moreover the strong exports growth of 25.1 percent in September mirrors the strong underlying economic momentum. The country’s foreign-exchange reserves, the world’s largest, surged by a record to $2.65 trillion at the end of September.

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India’s wholesale price index rose to rose 8.62 percent in September from a year earlier after an 8.5 percent gain in August. Manufactured product inflation and Food price inflation rose by 0.3 percent and 1.6 percent respectively in September fromthe previous month. RBI Chief Subbarao said that inflation in India is being “quite stubborn,” a sign that controlling prices remains the central bank’s priority.

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Reserve Bank Deputy Governor Subir Gokarn signaled the central bank may intervene in the currency markets to shield exporters from the strengthening rupee. The capital account showed a surplus of $17.5 billion in the quarter to June 30, compared with a record shortfall of $13.7 billion in its current account.

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Foreign investors have so far poured approximately $23 billion in stocks and 10 billion indebt this year. Industrial production expanded by 5.6 percent in August after seeingan expansion of 15.2 percent in July.Going next week the main attraction for retail investors would be the primary market with Mega IPO of Coal India slated to open on 18th October. As Infosys has already rung the bell with positive surprise in terms of earning growth, the investors would now look forward to numbers of companies like L&T, HDFC, Bajaj Auto, etc that are scheduled to announce numbers next week.

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Nifty has support between5870-5950 and Sensex between 19200-19640 levels.With expecting second round of monetary easing, investors dumped dollar and endowed other investment avenues. Commodities extended a rally to the highest intwo years and CRB closed near the mark of 300. The dollar fell to its lowest in 10 months against a basket of currencies and breached the mark of 77. Five week continuous downfall enhanced metals and agricultural commodities.

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Gold gave heroic performance and made another life time high. It rose more than 25% in 2010.Silver is also trading near 30 year high. However, being prudent investors, one should book profit in gold and silver, considering safe trading. Base metals are expected to trade in a range. Crude oil should trade in range $80-85 in short run on mixed fundamental. OPEC has decided to keep the production quota unchanged in last meeting. Agro commodities should trade with high volatility ahead of expiry of October contract.

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CRUDE OIL…. “Black Gold …Key driver of Global Economy”

Crude oil is the key driver of every economy therefore it is known as “Life blood of Economy”. It has shown lot of volatile movements but has shown resilience despite below expectation US economic numbers and euro zone crises in May this year. Crude prices have more than doubled since dropping below $35 late in 2008, but are still significantly lower as compared to the record high near $147 a barrel in July 2008.

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Crude prices have been trading in wide range of $65 to $90 since last August 2009 .Crude prices have weathered the euro  zone crises very well as they did not break this wide range.

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In the month of June and July, the fall in the greenback and recovery in global equity markets have supported the prices higher. The pace at which crude oil is being used across the globe as fuel in transportation and its other byproducts in industrial applications, it is expected that prices will be well supported. Furthermore, the lack of major alternative fuel of crude and ever shrinking oil wells, coupled with lack of new exploration will give the bull’s upper hand in long run.

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But, as we have seen in the stunning run up to $147 in 2008 and then plunge from that high to below $37, it can be said that it is the speculative forces that run the crude oil more than the true fundamentals of supply and demand.

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The other energy source is natural gas and it’s available due to new found Shale gas supply in US but due to lack of proper infrastructure in place it is quite tough to presume natural gas to become a tangible replacement for oil any time soon.

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Today, China is the world’s largest consumer of energy. Continued demand of Chinese and Indian economies may support the crude prices in long term. But China’s crude oil imports in July fell 3.2 percent from a year earlier after record inbound shipments in June which has capped the upside.

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As the hurricane season in US is from 1 June to 30 November so hurricane premium also support the prices during this period. Recently hurricane premium has been seen in the crude prices as the prices did not see major sell off despite increasing stockpiles. Furthermore recovery in the global equity markets tends to be supportive for the prices.

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As the cost structure of drilling and exploration has gone up so the marginal cost of production has also increased. Companies are benefiting at present where crude oil prices hover between at $75 to $80, but if we do see upward pressure on the cost structure, again, over time we do see a rise in oil price.

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Recently contrasting economic data between the US and Euro zone as well as the earnings performances of the banking sector has been seen which continues to shore up the euro on the premise of broadening stabilization of interbank concerns and to a lesser extent robust recovery in Germany.

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OPEC opted for production cuts in earlier this year and 11 countries adhered to compliance except Iraq. OPEC countries boosted output from 24.845 million b/d by 80,000 b/d to 26.82 million b/d for the July 2010. This exceeded the OPEC 11 target by 1.975 million b/d and puts the group’s compliance rate at 53%.But in order to meet the growing demand OPEC produced an estimated 29.4 million b/d of crude oil in the second quarter of 2010 after remaining relatively steady for the past four quarters.

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US Distillate demand —-Pointer to industrial recovery

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The fall in the distillate demand in US is also a concerning factor as far as the demand scenario is concerned. The main driver of distillates demand is heavy use by industrial sector, which has been severely lacking in the second quarter. The U.S. actually had a year on year increase for distillate demand between 2009 and 2010 as high as 17.1% for the last week in May but it has cratered to +2.2% year on year in two months time.

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The stockpiles of distillate fuel in July month is at the highest level since the week ended Oct. 16. 2009. And this distillate inventory builds will cap the upside in the crude oil.

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Analysis:-The absolute change in the EIA crude inventories has shown fluctuation in wide range of -8 million barrels to +8 million barrels in the total weekly crude oil supply data.

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Current scenario

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Crude oil which often tracks events in the global economy is very much affected by the turbulences that take place in various key economic powerhouses. At present when the hysteria around the euro zone crisis began to subside, fears of US economic slowdown have begun to intensify. US recovery is still causing as indicated by its weak housing and labor markets.

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This slowdown is also captured in all the economic reports over the last two months, from housing and manufacturing, to employment and GDP. All these economic reports are below the expectations, and prior reports are being revised down. It appears the US economy really slowed down over the last two months in particular.

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The crude oil outlook going forward in rest of the quarter is quite bleak as the bulk of the summer driving season in US is over, and now we have less demand and inventory is rising at the same time in this commodity.

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News Round Up 2nd -6th August 2010

•India’s food ministry proposes to sell 2.74 million metric tonnes of food grain over the next six months from federal stocks in a bid to free-up warehouse space.

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•The government has allowed export of 3,00,000 tonnes of rice and wheat through diplomatic channels to Bangladesh and Nepal.

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•Soyabean Processors Association of India expects soybean production in the country at 85 lakh tonnes (lt), which is far below last year’s 95 lt.

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•Turmeric area in Andhra Pradesh stood at 0.53 lakh hectare against 0.41 lakh hectare, nearly 101 % of the normal area covered.

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•Water level in India’s main reservoirs was at 19 per cent of capacity on July 22, 2 per cent higher than the previous week’s level, government data showed.

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•Wholesale Price Index For food articles 9.67% on week ending 17 July against 12.47% previous week.

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•Commodity futures market regulator FMC may consider the creation of an appellate tribunal akin to that in stock markets for the resolution of disputes between clients and brokers.

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•Supply from the OPEC (except Iraq) has averaged 26.95 million barrels per day (bpd) this month, up from 26.75 million bpd in June, according to the survey of oil firms, OPEC officials and analysts.

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CRUDE OIL ECONOMIC RECOVERY IS HELPING CRUDE RALLY

Crude oil, the life blood of the economy, is rallying to highest levelssince 2008 highs, indicating that the global economy is back on track which is also supported by rise in key global equities markets. In the first quarter of 2010, front-month NYMEX crude prices rose 5.6%.

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Crude oil prices have negated the hike in dollar index and crude stockpiles in US. Traders have placed fresh bets on a rise in demand affirming a faster pace of economic recovery in the US. Crude prices have more than doubled since dropped below $35 late in 2008, but still significantly lower as compared to the record high neaar $147 a barrel in july 2008.

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Positive economic indicators of US like PMI, home sales and employment data are showing that economic recovery is back on track and that will increase fuel consumption. Data showing an unexpected increase in pending home sales and a survey result indicating service sector growth added to investors’ confidence in the US economy .

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The institute of supply management’s non-manufacturing index rose to 55.4 in the month from 53.0 in february, sharper than economists expectation for a modest increase to 53.6.

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A report from the National Association of Realtors the pending home sales index rose 8.2% to 97.6 in february,  from a downwardly revised 90.2 in the previous month, countering consensus expectations for a 51 decline.

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According to EIA “Projected economic growth this year is higher in this forecast, with U.S. real GDP growing by 208% and world oil consumption weighted real GDP growing by 3.4%”. Given expected oil demand growth in 2010, oil prices should continue to firm despite expected increase in both non- OPEC and OPEC production this year.

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According to EIA” projected growth in domestic crude oil production is more moderate in 2010, increasing by about 210,000 bbl/d” Crude oil future outlook looks promising as it is driven mainly with global economic recovery. And summer demand in US will also keep the prices well supported.

COMMODITY WEEKLY COMMENTARY

Most of the commodities closed in positive territory when Federal Reserve repeated its pledge to keep monetary conditions loose for the longer term. Impact was seen on all metals and energy; despite the rise in dollar index. Base metals complex was no exception, copper traded in upside territory.

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Power distribution problems after a devastating earthquake in Chile also supported the price. Terrific short covering witnessed in nickel on the news that BHP Billiton would take up to two weeks to restart nickel production at its Kwinana refinery in Australia apart from other factors. Both, lead and zinc closed down.

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Event risk made energy complex volatile. OPEC for the fifth time since 2008 decided to maintain its production limits unchanged. Furthermore, crude stocks rose 1 million barrels last week, while distillate inventories fell 1.5 million barrels and gasoline stocks dropped 1.7 million barrels, according to EIA.

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Crude traded in upside territory but could not breach $83 per barrel. Worries about Greece’s debt problems capped the upside. Surplus in inventory gave a jolt to natural gas prices and its futures dropped to the lowest price in more than five months. Vague movements in dollar index and euro resulted in see saw movements in bullions. However, on Friday many commodities including base metals and energy complex erased their previous gains on rise in dollar index.

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Agri commodities on domestic front traded with sideways to bullish bias in the week gone by. Guar pack remained in range due to subdued trading activity in spot as well as future market. In oil seed section; soya bean prices traded in range while mustard seed futures gained smartly on NCDEX.

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Weak trend in overseas market and bearish domestic fundamental factors such as weak export demand for soya meal and ample inventories of edible oils capped the upside in soya bean prices. The sharp decline in Malaysian palm oil futures had also pressurized the prices. However, mustard futures gained on the back of strong fundamentals. Lower production projection for the current year had a positive impact on the market.

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In spices pack; turmeric and pepper shot up like a bullet last week while chilli and jeera futures remained range bound. Pepper futures traded on a positive note due to continued fresh buying on the exchange supported by the factor of tight supply situation amid gaining demand. Despite the expectations of increase in production, arrivals are on the lower side. This is leading to tight supply in the physical markets. Turmeric futures gained consecutively for the sixth week and hit contract highs in the week gone by on firm spot cues and low stocks, but conceded the gains by the end of the week on profitbooking.

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Rising arrivals and ample carry forward stocks were seen weighing on chana futures as prices settled in red zone.

CRUDE OIL …. “Can It Continue The Recovery With Same Pace In 2010”

Crude oil, which is the  lifeblood of the economy, has shown stunning recovery in this year as prices have merely doubled from low of $35 to nearly $80. Thanks to the dose of economic stimulus packages which revived the global economy to come out of recession and hence the traders sentiments in crude oil turned in favour of bulls. But the million dollar question is that can crude continue this recovery in medium term. But as of now it seems that the speculative upside and downside rally is over which was seen when it rocked higher toward $147 and then plunged to $35. From here on, the key fundamentals of supply and demand will be the driver of crude prices.

In the year 2009 dollar weakness was the prime reason for the swift rally in crude oil prices. As crude oil is considered as other asset class and massive flow of hedge funds supported the crude oil prices.

Stunning recovery worldwide after a severe recession and the improvement in expected GDP figures by IMF also kept bulls interested.

Now as the global economy is slowing limping back to normal which is suggested by various economic indicators but still the skepticism of pace of recovery is questionable which will further guide the crude movements.

It is important to remember that current pricing on crude oil is influenced by world demand, not just U.S. demand. The Asian economies are improving; China’s economy expanded by 8.9% in the third quarter. Global macro economy will be the key driver of the crude oil prices in times to come.

Crude oil is primarily a transportation fuel. So increase in crude oil usage in transportation will get boost as the global economy continue to recover.

Oil has risen by 79 percent this year on signs that global economy is recovering from its worst recession since World War II, stoking fuel demand amid output cuts by the Organization of Petroleum Exporting Countries.

OPEC countries kingpin Saudi Arabia, also believes that $75 per barrel is a fair price for both consumers and producers. In September meeting, OPEC members said they were content with the direction in which prices were heading. While voicing worries about high oil stock levels globally, they decided to hold production steady and focus on compliance factor with existing production quotas. The lack of production discipline, however, appears to continue. According to latest OPEC report group’s production averaged 26.52 million barrels per day in October, a 50,000 barrel per day increase from September.

Recently OPEC, supplier of about 35 percent of the world’s crude oil, revised its estimate for 2010 global demand growth by 750,000 barrels or 0.9% to 85.07 million barrels a day. OPEC in September agreed to maintain output quotas at 24.845 million barrels per day, will hold its next meeting in Luanda, Angola, on December 22.

The hurricane season in the US has also remained quite in this year as no major hurricane hit the US refineries. Hurricane season generally starts from June 1 and lasts through November.

In a nutshell crude oil will not see one sided movement and will remain volatile in the year 2010. Dollar index has been under lot of pressure in the year 2009, which has given support to the crude oil prices but as the dollar index is expected to show some recovery in first quarter of 2010 that can exert pressure on crude oil prices.

OECD demand of energy is slated to increase in the year 2010 and will give support to the crude prices. China energy demand is also expected to rise in the year 2010 and that will keep the prices supported.

So overall the prices in the next year can remain in the range of $55-85.