Monday, February 17, 2014

Market Commentary

The energy complex continues to exhibit strength with both crude

oil and natural gas ending the week on a positive note. Although

natural gas rallied sharply yet again owing to a winter storm, the

gains in crude oil were quite limited as economic data was weak

and investors are still unsure about the sustainability of oil prices

above the $100 level. Yet, the recent upgrade in demand forecast

from the likes of IEA, OPEC and EIA will support crude oil prices

in the near term. Crude oil prices continue to trade choppy and

stuck near the $100 level for most part of last week. Natural gas

still has near term support on cold weather conditions and it

ended the week with almost 8% gains bringing its year to date

gain to 22%. Meanwhile crude oil gained marginally by 0.27% for

the week.

Exchange

Contract

Open

Close

1 Week Chg

%change

OI

OI change

Pivot

Resistance

Support

Crude Oil

MCX

NYMEX-WTI

Mar

Mar

6180

100.05

6198

100.4

18

0.35

0.29%

0.35%

9421

142655

-369

-116660

6211

100.30

6267

101.48

6143

99.21

ICE-Brent

Mar

109.75

109.07

-0.68

-0.62%

22082

-104763

108.89

109.93

108.03

Context

The crude oil market has been supported by a steep draw in

product inventories over the last few weeks and developments

this week further point to supply tightness in the near term. The

Energy Information Administration last week lowered its U.S.

crude oil production forecast for this year and next year due to

recent severe weather but said improving technology could boost

shale oil output over the next two years. In its latest monthly

short-term energy outlook, the EIA cut its 2014 crude oil

production forecast by 100,000 barrels per day to 8.4 million bpd

and by 100,000 bpd to 9.2 million bpd for 2015. It also raised its

2014 world oil demand growth forecast by 50,000 barrels per day

to 1.26 million bpd.

d

Later the IEA in its monthly report said that global oil demand

was surprisingly robust, partly due to OECD recovery and said

Context

oil supply has disappointed, helping drain inventories.

that global

The IEA also said that there was no evidence of a market glut

and raised its forecast for global oil demand growth in 2014 by

50,000 bpd to 1.3 million bpd. Also on the supply side, Libyan

Exchange

Contract

Open

Close

1 Week Chg

%change

OI

OI change

Pivot

Resistance

Support

Natural Gas

MCX

NYMEX-NG

Feb

Feb

299.8

4.45

324.4

4.70

24.6

0.25

8.21%

5.55%

12297

146003

1505

-80464

314.5

5.05

343.8

5.54

295.2

4.71

USD/INR

NSE

Feb

62.765

62.42

-0.345

-0.55%

116521

22062

62.61

62.83

62.20

Front Month Calendar Spread

Exchange

MCX

NYMEX

1st month

22

-0.07

2nd month

-9

-1.4

WTI-Brent spread

1st month

2nd month

8.67

8.33

1

Please refer to the disclaimer at the end of the report.

Energy Weekly

supply remains volatile as output from the Sharara field slid to

200,000 barrels a day from 350,000 barrels after protesters shut a

pipeline to the Zawiya terminal.

On the inventory side, API data on Tuesday showed a further 2.5

million-barrel decline in crude stocks at Cushing even as total

barrel

inventories climbed. Distillates, including heating oil and diesel, fell

by 1.5 million barrels, while U.S. crude stockpiles rose by 2.1 million

barrels. In the EIA report later, U.S. crude oil inventories climbed

by 3.27 million barrels to 361.4 million and supplies of distillate fuel

decreased by 731,000 barrels to 113.1 million. Cushing inventories

have started to decline as the southern leg of Keystone XL pipeline

began shipments last month. The line was initially flowing at

288,000 barrels a day and will ramp up over the course of the year

toward the 700,000-barrel capacity. On the flip side, oil demand fell

barrel

for a second week, down 569,000 bpd to 18.5 million bpd and

production of crude oil increased 88,000 barrels a day to 8.13

million bpd.

On the demand side, Chinese demand continued its run of strength

as crude imports hit record high in January. Oil imports in January

rose by almost 12% year on year from a year earlier to a record

6.63 million bpd. Imports of refined oil products fell 3.8% from a

year ago to 3.76 million tonnes. Economic data from Europe was

slightly better with GDP growth. Euro zone GDP rose by 0.3% in the

third quarter, and 0.5% compared to year a and this was the first

ago

sign of annual growth since 2011. U.S. data was soft with Industrial

production declining 0.3% in January and Manufacturing output

falling by 0.8%.

On the natural gas front, inventories fell sharply by 237 bcf last

week and are currently at the lowest level since 2004 for this time

of the year as cold weather continues to increase heating demand

and deplete inventories. The inventory drop was 46% hig

higher than

the five-year average and the deficit to its five

year

five-year average

inventory levels widened to a record 27%. We believe that natural

gas will remain volatile with a slight upward bias in the near term

but prices could decline later on moderating weath forecasts.

weather

Outlook

The support to crude oil from economic data seems to be little but

nonetheless tight supplies could support prices in the near term.

Also, speculators raised their net long U.S. crude futures and

options by 26,882 contracts to 364,133 which suggest that the bias

in the market is still bullish. On the price front too, crude oil has

been sustaining well near the $100 level and if it sustains above

$100.75 we could see a rally towards $102.0

$102.0-102.5 levels. Strong

downside support is at $99.5 and only if it breaks that level we

.5

could see reversal in trend.

US Crude Oil Production

8500

8000

7500

7000

6500

Source: Reuters

US Crude Oil Production (in KBD)

Chinese Crude Oil Imports

30000000

25000000

20000000

15000000

10000000

Source: Reuters

2

Please refer to the disclaimer at the end of the report.

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Energy Weekly

Crude oil

On the MCX, We believe 6270-6300 is a major resistance zone for

6300

crude oil and this zone can provide good selling opportunity in the

near term if it fails to cross yet again after many attempts

attempts.

However a breach above those levels could take price towards

prices

6350-6380 very quickly. On the downside 6060

6060-6040 remains a

key support to be broken for a sustained downside rally.

Natural gas

On the MCX, We believe sell on rallies to be the strategy going

forward. For natural gas, 338-342 zone looks to be a major

resistance and only a sustained close above the previous highs

would make the trend very bullish. Strong downside supports are

in the strong support at 312-320 regions.

For any details contact:

Commodities Advisory Desk - +91 22 3958 3600

commoditiesresearch@motilaloswal.com

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