Energy Report - 7th March 2011

8/3/2019 Energy Report - 7th March 2011

http://slidepdf.com/reader/full/energy-report-7th-march-2011 1/5

1

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



2


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



3


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



4


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



5


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].

Ackruti Star, 6th Floor, Central Road, MIDC, Andheri (East), Mumbai 400 0 93. Tel: 403 58600

Energy Report - 7th March 2011

Documents