10th Dec 2018

Fundamental Outlook Crude Oil: For the coming month, we expect global crude oil prices to trade mixed as the OPEC member countries along with the approval of the Non-OPEC member countries have decided to cut supplies But then, US inventories have been reported to be higher as compared to inventories stated in the past couple of months, which is more likely to cap prices in the market. Moreover, crude oil production in the United States refineries have reported to be at an all time high during the current period, which is also projected to cap major uptrend in international crude prices. Elsewhere, India will import crude oil from Iran using a rupee-based payment mechanism, adding that 50% of those payments will be used for exporting items to Tehran. An agreement had also been signed by India and Iran on 2nd November regarding the same and this may also limit major upside in crude prices. Under U.S. sanctions, India will be allowed to export farm commodities, food, medicines, and medical devices to Iran. However, items such as petroleum and petrochemical products, automobiles, steel, precious metals and graphite are not allowed to be exported to Tehran.

Conversely there can near term increase in imports from Chinese Industries after U.S. President Donald Trump and Chinese President Xi have agreed to hit pause on the trade war based on the deal made during the G-20 meeting in Argentina. This is also likely to limit major downtrend in global crude prices during the coming weeks. In consideration with the above factors, we expect mixed trend in MCX Crude Oil prices for the month.

For the upcoming month, Brent crude oil prices are expected to trade in the range of $57/bbl to $67/bbl and on the domestic front, prices are estimated in the range of Rs.3200/bbl to Rs.4100/bbl.

Natural Gas: For the coming month, we expect NYMEX natural gas prices to trade higher due to steady supplies, rising demand and falling inventories reported in the US market. US Natural Gas inventories for the week ending 23rd November has reported at 3054 billion cubic feet, lower by -2.83% compared to 3143 billion cubic feet reported during last month. On the other hand, the demand in United States has shown a weekly rise and is currently higher than the supplies, which is more likely to support Natural gas futures. Though the temperatures are forecasted to be near normal, but then again demand for natural gas during the current winter season is relatively higher as compared to the earlier months due to increased usage in the heaters. Hence we expect bullish trend in the NYMEX Natural Gas futures for the month ahead.

In the Indian scenario, demand for natural gas in the power sector is expected to higher for the month ahead as temperatures are forecasted to be cooler in the current season. Moreover, the Rabi Crop sowing across the country is forecasted to continue till the end of the year, which is estimated to keep the demand for natural gas higher in the fertilizes sectors. Hence we expect bullish trend to continue in MCX Natural Futures for the coming month.

For the next month, natural gas prices in the international market are expected to trade in the range of $4.570/mmbtu to $4.776/mmbtu and on the domestic markets are estimated to trade in the range of Rs.272/mmbtu to Rs.355/mmbtu.

Crude Oil prices in the above exchanges had witnessed significant decline during the month of November, due to higher supplies and lower demand in the global markets. Moreover, prevailing tensions regarding US China trade wars, possibility of US sanctions being imposed on Saudi Arabia after the death of the US journalist Khashoggi had brought fears in the global market eventually leading to decline in crude prices. Furthermore, lower industrial usage of Crude in the chinese industries during the past months also led to decline in global crude prices.

Looking forward for the coming month, we expect International Crude futures to trade mixed due to supply cuts of 1.2 million billion barrels per by the OPEC member countries in its latest OPEC meeting in Vienna. But then, United States is taking effort to keep the prices steady by further increasing their refinery production. However, major uptrend in prices many not also be witnessed for the coming weeks owing to slightly lower inventories on a yearly basis. As per EIA (US Energy Information Administration) weekly report ending on 30th November, domestic production of crude oil reported at 11700 thousand bpd (barrels per day) similar compared to previous week.

But, on a yearly basis, the domestic crude oil production has risen in United states by 20.53% till Nov’18 compared to previous year’s production of 9707 thousand bpd. Higher production on a yearly basis has led to significant rise in exports to Mexico. Exports for the week ending at 30th Nov’18 have reported at 3203 thousand bpd higher by 1845 bpd compared to 1358 thousand bpd of Nov’17. On the other hand, the imports ending on the above week has reported at 7219 thousand bpd similar compared to previous year’s imports of 7202 thousand bpd.

The overall refineries inputs in U.S. averaged at 17.487 million barrels, higher by 1.70% compared to corresponding period last year’s inputs of 17.195 million barrels. Refineries have majorly operated at 95-96% of their operable capacity during last month which has been similar compared to preceding months.

The above chart showcases that US Crude Oil inventories which has reported at 443200 thousand barrels till 30th November’18. It higher by 17196 thousand barrels compared to 426004 thousand barrels reported on 26th October. However, it is still down by 4903 thousand barrels compared to 448103 thousand barrels reported on 1st December’17.

-22.02% -22.21%

-26.90% -30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

Nymex Crude Oil($/bbl)

Brent Crude Oil($/bbl)

MCX Crude Oil(Rs./bbl)

Crude Oil Performance in Nov '18 (%)

Source: Bloomberg, Choice Research

310000

360000

410000

460000

510000

560000

Weekly US Crude Oil Inventories

Source: Bloomberg ,Choice Research

Overall, the US Crude inventories has been on arising trend during the last few months owing to lower industrial usage due to trade war tensions and rising overall supply in the global markets. Since, the OPEC member countries have currently not given their final decision regarding the production cuts in the global markets, we are expecting overall inventories to remain steady to higher for the coming month as well.

On a monthly basis, total motor gasoline inventories fell by 1618 thousand barrels on 23rd November and reported at 224778 thousand barrels. Currently the Gasoline inventories are gradually declining on a seasonal basis owing to higher usage in the Unites states. However, out of the total motor gasoline inventories, finished gasoline inventories increased to 24.6 million bpd from 23.8 million bpd on a yearly basis, while blending components inventories has shown a rise from 190.2 million barrels to 199.9 million barrels. Overall the past seasonal trend showcases that gasoline inventories are estimated to decline in the coming months owing to higher demand in the global markets.

The above distillate fuel inventories has been gradually declining on a yearly basis and has shown a fall by 4521 thousand barrels during the November month and reported at 121801 thousand barrels. Currently it is still in the lower half of the average range for this time of year, due to lower imports and production of distillate fuel in the United States. Distillate fuel inventories during the current period has declined by -12.87% compared to 149200 thousand barrels during the corresponding period of the last year. On the other hand, propane/ propylene inventories decreased by 1.3 million barrels during last week to 79.8 million barrels. However on a yearly average range basis, it has remained higher compared to 74.5 million barrels during the same period of the last year. Overall the above US production and inventories scenario may keep the prices on the lower levels. However, recent supply cuts by the OPEC member countries may support the global Crude prices from the lower levels during the coming weeks.

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210000

220000

230000

240000

250000

260000

270000

Weekly US Gasoline Inventories

Source: Bloomberg, Choice Research

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120000

130000

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170000

180000

Weekly US Distillate Inventories

Source: Bloomberg, Choice Research

The above chart gives a depiction of the total OPEC crude production trend on a monthly basis including some of the major crude oil producing countries. Looking at the above trend, the total OPEC production had peaked out during Nov’16, which eventually pressurized Brent crude prices to $43-50/bbl levels. Another high in OPEC production was witnessed in July’17, which also reduced the global crude prices. Post July’17, OPEC crude production been gradually declining till May’18 and the Brent crude prices has been progressively rising. But then again, the OPEC Crude production started to incline once again till the last month. Yet, the similar outcome had not been witnessed in the prices during the earlier months due to supply tightness which had prevailed in the global markets. This had eventually spiked the Brent oil prices up to $86/bbl by first week of October. Post the peak, crude prices begun to decline as the OPEC member decided to release their excess stocks eventually bringing down the prices. Total OPEC production for the month of November has inclined to 33130 thousand barrels per day(bpd), similar compared to previous month.

In addition, crude production in Saudi Arabia have shown a rise of 3.18% to a total of 11020 thousand barrels. Saudi Arabia still remains the key producer of Crude Oil among the OPEC members. Iraq on the other hand has reported lower production of -3.43% during Nov’18 to a total of 4500 thousand barrels. The reason for the Iraq’s inability to boost production considerably is the political and economic situation. Currently it is dealing with protests in the south prompted by problems ranging from a lack of access to clean drinking water and electricity to high jobless rates. Last month, Iraq’s oil exports dropped to their lowest level in seven months due to bad weather at its southern ports. According to a statement from Iraq’s oil ministry, and reported by global commodities data provider S&P Global Platts, Iraq’s federal exports in November averaged 3.372 million bpd, the lowest level since April this year. Yet, Iraq—OPEC’s second-biggest producer after Saudi Arabia—has been raising its crude oil production and exports this year, especially after the June meeting at which production cuts were relaxed. Now that Baghdad has reached an agreement to export its Kirkuk oil via the Kurdistan pipeline to Turkey, it could be a headache for OPEC, which may discuss a fresh production cut in the coming days.

Elsewhere, Nigeria has reported production of 1760 thousand bpd lower by -2.22% compared to the previous month. Considering Saudi’s Allies such as Kuwait and UAE, crude production inclined by 0.36% and 4.81% in that order, to 2800 thousand bpd and 3270 thousand bpd respectively. Along with Saudi Arabia, UAE has set a record high production during the last month in comparison to the previous months.

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2000

4000

6000

8000

10000

12000

30000305003100031500320003250033000335003400034500

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

May

-18

Jul-

18

Sep

-18

No

v-1

8Total OPEC (LHS) Iran (RHS)Venezuala (RHS) Nigeria (RHS)Suadi Arabia (RHS) Iraq (RHS)

Source: Bloomberg, Choice Research

Trend in Major OPEC Crude Production ('000 bpd)

Conversely, Libya (OPEC Member) has shown a decline in production by -1.67% to 1180 thousand barrels. The North African country has been struggling to rebuild its energy industry since its 2011 revolution that ousted longtime leader Muammar Gaddafi and the ensuing collapse in central power. But, OPEC weighing on cuts due to declining global crude prices has led to slight fall in crude production in the previous month. Similarly, crude production in Iran has shown a decline by -6.93% to a total of 3090 thousand bpd, while Venezuela's crude production has remained near flat totaling at 1230 thousand bpd. Iran’s production and exports has witnessed a drastic decline post the implementation of the US sanctions on 4th November. Iran gave OPEC the green light on Friday to reduce oil output by around 0.8 million barrels per day from 2019 after finding a compromise with rival Saudi Arabia over a possible exemption from the cuts, an OPEC source said. Tehran has emerged as a key sticking point for a deal but sources said the difficulties were now in the past and OPEC was refocusing on talks with non-member producers led by Russia to reduce supplies and prop up oil prices. Venezuela had failed in its new payments system and this would probably lead to further crashing of its domestic currency, owing to rising financial crisis and hyperinflation in the country. However, as per the recent news, Russia and Venezuela have signed contracts to guarantee US$5Billion investments to Boost Venezuelan Oil Production. This would also involve Russian partners of joint venture. Currently, Russia and China are the only partners of Venezuela and Venezuelan President Nicolas Maduro thinks that it has found a point-

-that helps their economy survive and launch a rather full, comprehensive economic programme that fully complies with the economic relations between Russia and Venezuela. Though there has been recent delays in shipments of Oil by Venezuela as stated by he chief executive of Russia’s biggest oil producer Rosneft, when he flew to Caracas to have words with Maduro. Nevertheless, Venezuela is likely to make cash repayments for the earlier mentioned investments by Russian in the form oil supplies. Elsewhere, as per recent sources, India will import crude oil from Iran using a rupee-based payment mechanism, adding that 50% of those payments will be used for exporting items to Tehran(Iran’s Capital). India's state-owned UCO Bank is expected to announce the payment mechanism in the next 10 days, the source said on 6th December. "An agreement had been signed by the Indian and Iranian government on Nov. 2 of this year for oil payment in rupees and 50% of those funds had been earmarked for exports," according to an Indian government document reviewed by Reuters. Oil payments are being made in rupees only as against earlier arrangements where there was a ratio of 45% rupees and 55% euros, the document said. Russian and Chinese shipping companies were pitching to facilitate India-Iran trade, the source said. Under U.S. sanctions, India will be allowed to export farm commodities, food, medicines, and medical devices to Iran. However, items such as petroleum and petrochemical products, automobiles, steel, precious metals and graphite are not allowed to be exported to Tehran.

The above table showcases the trend of China’s crude imports which has been gradually rising a monthly basis. For the month of Nov’18, China has imported approx. 42.61 million tonnes, higher by approx. 10% compared to 38.74 million tonnes reported on Oct’18. As per recent sources sources, China has agreed to reduce oil imports from Iran as this would also give further implementation of the US sanctions on Iran. Moreover, China plans to buy US crude oil now that Trump and Xi have agreed to hit pause on the trade war based on the deal made during the G-20 meeting in Argentina. Chinese oil trader Unipec plans to resume U.S. crude shipments to China by 1st March (when the 90-day negotiating period agreed by the leaders of the world's two biggest economies comes to an end) owing to reduced the risk of tariffs being imposed on these imports, sources with knowledge of the matter said. Other Chinese buyers are also likely to rush in importing US crude oil during the above tenure as said by senior executive of Sinopec, adding that the oil has to arrive in China before March 1. This may however increase demand from China in the short term and eventually support Crude prices in the international markets.

In conclusion, though the overall OPEC crude production has been forecasted to be higher on a monthly basis, but then expectancy of supply tightness in the global markets by the OPEC member countries is likely to support international Crude prices.

Additionally, reduced production and supplies in Iran, owing to sanctions by United States and prevailing domestic hitches & management issues in Venezuela would also cause supply shortages in global markets.

But then, India oil prices may not have significant impact due to the US sanctions due to temporary waive off by the United States. Moreover, India has recently planned to import Iranian Oil using rupee-based payment mechanism which could cap any major upside in crude prices.

Furthermore, US inventories on a monthly basis has shown an incline as compared to the inventories reported in the past couple of months, which is more likely prevent spike in crude prices in the market. Likewise, the US production at a record high which also possibly cap global crude price.

However, there can near term increase in imports from Chinese Industries after U.S. President Donald Trump and Chinese President Xi have agreed to hit pause on the trade war based on the deal made during the G-20 meeting in Argentina. This is also likely to limit major downtrend in global crude prices during the coming weeks.

The above global production reports and geopolitical factors are estimated to have a mixed impact on the International and MCX Crude Futures for the coming month as well.

20.00

25.00

30.00

35.00

40.00

45.00

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

Dec

-17

Feb

-18

Ap

r-1

8

Jun

-18

Au

g-1

8

Oct

-18

Source: Bloomberg, Choice Research

Trend in China Crude Imports (million tonnes)

Nymex Natural gas prices has witnessed a significant inline of 41.43% during the month of November owing to extreme climatic conditions witnessed in various parts of the United States which led to higher demand for both heaters and air conditioners in various regions of the country.

On the domestic front, MCX prices also inclined exponentially by 31.37% in the month of August with increased demand in the fertilizer sectors owing to ongoing rabi crop sowing period in the country.

Looking forward for the coming month, we expect NYMEX natural gas prices to trade higher due to steady supply, rising demand and declining inventories in the United States. As per EIA (US Energy Information Administration) weekly report ending on 28th November, supplies have reported at 92.9 Bcf/d (billion cubic feet per day), similar compared to previous week’s supplies of 92.4 Bcf/d. However, the demand has slightly inclined to 101.1 Bcf/d from 100.8 Bcf /d of the previous week. Since the demand is still reported to be higher compared to supply on a weekly basis, we are expecting Natural gas prices to be remain supported in the markets. Incline in demand has been majorly observed in the power sector, residential and commercial sectors.

The above chart showcases the US Natural gas inventories which had hit the lowest levels in Apr’18, but it has shown an gradual incline till the mid of November’18. Post Mid November inventories start to decline owing to changing weather conditions and season from Autumn to Winter. This has eventually increased the demand for heaters/power sectors in the natural gas sectors. Additionally, natural gas demand in the winter heaters is relatively higher than the demand for air conditioners in summers. Currently the inventories have reported at 3054 billion cubic feet till 23rd November, lower by 2.83% compared to 3143 billion cubic feet reported during last month. For the coming month, we are expecting US natural gas inventories to further fall, as the demand is forecasted to be higher due to higher usage in the power sectors and LNG pipeline receipts during the current season .

In the Indian scenario, demand for natural gas in the power sector is expected to higher for the month ahead as temperatures are forecasted to be cooler in the current season. Moreover, the Rabi Crop sowing across the country is forecasted to continue till the end of the year, which is estimated to keep the demand higher in the fertilizes sectors. Hence we expect bullish trend in MCX Natural Prices for the coming month.

41.43%

31.37%

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%

Nymex Natural Gas ($/mmbtu) MCX Natural Gas (Rs/mmbtu)

Natural Gas Performance in Nov'18 (%)

Source: Bloomberg & Choice Research

800

1,300

1,800

2,300

2,800

3,300

3,800

US Natural Gas Inventories

Source: Bloomberg, Choice Research

US CPC (Climate Prediction Center) survey for next one month, showcases that warmer temperatures are expected to cover western, northern and eastern regions of United States. Higher temperatures are likely to be witnessed in south eastern and Alaska regions which could bring rise in demand for air conditioners/ power sectors. However, temperatures are likely to be near normal in the central-western regions. Overall temperatures are likely to be 33-50% above averages making a net higher to normal temperatures.

Technical Outlook

MCX Crude Oil

Crude oil prices witnessed a decline trend during the month of November 2018 due to supply of crude oil has outstripped its demand. Crude oil production in the US is increasing on a monthly basis and it became the largest producer. On the daily chart, MCX Crude Oil (Jan) future has given “Falling Channel” formation breakout and sustained above it. Moreover, Price has also found the support at lower “Bollinger Band” formation and shifted into positive zone after a long correction on the daily chart. Furthermore, momentum indicator RSI and MACD has shown positive crossover; which adds more bearishness to the price. In addition, price has moved below 21 days SMA on the daily chart, which signifies bearish sentiments in the counter. So based on the above technical parameters, we expect sideway to bullish momentum in MCX Crude Oil (Jan) for the month ahead. On the higher end, price may move towards Rs.4100 levels, while on the lower end, it may find the support around Rs.3200 levels.

Technical Outlook

MCX Natural Gas

On the daily chart, MCX Natural (Jan) prices are struggling within a range bound momentum; where it is unable to break upper range of Rs. 345 level while on downside Rs. 270 level; which indicate a sideways to bullish move in the price. On a weekly chart, MCX Natural Gas has given “Symmetrical Triangle” breakout and sustained above the formation; which suggests more bullish trend in the counter. Moreover, Price has sustained above “Ichimoku Cloud” where TenkanSen has crossed KijunSen, which reinforce bullish signals for near term. Furthermore, price has also moved above upper “Bollinger Band” formation; which point out bullish rally will continue further for near term. In addition, price has moved above 100 days SMA on the daily chart, which signifies bullish sentiments in the counter. On the other hand, a momentum indicator RSI and MACD has shown positive crossover on the weekly chart; which adds more bullishness to the price. So based on the above technical parameters, we expect bullish momentum in MCX Natural (Jan) for the month ahead. On the higher end, price may move towards Rs.355 levels, while on the lower end, it may find the support around Rs.272 levels.

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