Sunday, February 21, 2016

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Over the past 18 months, crude oil prices have fallen to below $35 per barrel from their apex of above $110 per barrel and since then the price have been on a downward swing, following a rock and roll path.

"The key takeway from the current volatility of crude oil prices is that we are starting to see a fall in production and it’s going to continue week-to-week," said Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC who helps manage $13.5 billion. "The theme of the earning calls has been the cutting of production forecasts."

Amidst extreme cimpcomplexities, implementation of the freeze remains unclear because Saudi Arabia and Russia said their commitment depends on other nations participating. 

Moreover, Iran’s cooperation is crucial to the success of the plan to halt the fall in prices, according to Daniel Yergin, vice chairman of IHS Inc. 

The pact will have “little impact on the oil market as proposed, while there remains high uncertainty that it even materializes,” said Goldman Sachs Group Inc.

On the other hand Iran is seeking to boost output by 1 million barrels a day and regain market share. The nation should increase production by 500,000 barrels a day by March 20, the end of the Iranian calendar year, Shana reported on Wednesday, citing Roknoddin Javadi, managing director of National Iranian Oil Co.

Now if we are talking of a freeze in production, then there are two things to consider: a freeze in production which maintains the oversupply situation and so it cannot sustain positive price movement on a long term basis and if the freeze is maintained and economic growth picks up, then there is an economic growth that will drive demand to meet up with supply.

Now while CMC Markets, a UK-based trader, in its analysis believes that oil prices are going to have to rise at some point, it still recognises that there is so much production currently underwater.

CMC Markets notes that oil prices at $34 per barrel could be the next resistance point for the commodity. It explains from a technical perspective that if oil can break above $34 per barrel for a while, then the northwards rally could have some momentum.

Again, at $35 per barrel, many oil and gas companies are cutting their expenditure on energy projects. Royal Dutch Shell for example announced earlier in the month that it had cut its 2016 capital spending to $33 billion, down from its previous projection of $35 billion.

Similarly, reports indicate that US Oklahoma-based Continental Resources also plans to reduce its investment this year by 66 per cent.

Meanwhile, favouring the crude oil bulls, there were media reports that the US oil rig count slided for ninth straight week. The number of U.S. oil rigs fell by 26 to 413 for a ninth straight week of declines to the lowest level since December 2009, according to the latest survey from Baker Hughes reported Friday.

The total rig count, which includes one fewer gas rig for a total of 101, fell by 27 from last week to 514 and is now down 796 rigs from last year's 1,310, with oil rigs down 606, gas rigs down 188, and miscellaneous rigs down 2.

Analysts, across the broad spectrum believe that the reduction in capital investment and rig count is not just expected to allow oil and gas companies to save funds to strengthen their balance sheet position, but would also help them to bridge the gap between supply and demand in the coming months.

Thus, at present there is a 50:50 chance for a likely, positive price movement in the near future. This is a tad better than the earlier 30:70 or 40:60 chances. 

In such circumstances, it would be prudent to re- enter energy or its related counters (Tata Steel, Vedanta Ltd, Hindalco, etc), this week; of course with strict stop losses.
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