Energy Monthly Report - June 2015

Major News and Developments

OPEC finds oil output consensus – decides to keep its tap open

OPEC is set to carry on pumping oil nearly flat-out for months more, content that last year's shock market therapy has revived moribund demand and knocked back growing competition.

With oil prices having stabilised, for now, at around $65 a barrel, some $20 off their January lows, there's little appetite within the Organization of the Petroleum Exporting Countries to modify production limits, as some analysts have suggested is an outside possibility.

India’s state refiners in talks with Iraq to buy oil

State refiners Indian Oil Corp and Hindustan Petroleum Corp are holding talks with Iraq's national oil company to buy 4 million barrels of Basra light crude oil for India's strategic petroleum reserves, three sources said.

India in March asked the state refiners to each seek two very large crude carriers of Iraq's Basra crude oil for arrival in May-June totalling 8 million barrels for the reserves in the coastal city of Vizag in southern Andhra Pradesh state.

Iran’s nuclear deal deadline to be historical if approved

Foreign ministers from major powers were set Thursday to turn the screws on Iran to finalise a historic nuclear deal on the eve of a deadline to present it to US lawmakers.

If the US Congress does not receive the text by early Friday morning Vienna time -- midnight in Washington -- it makes the approval process longer and potentially more problematic.

Building on a framework agreement from April, the deal would see Iran dismantle large parts of its nuclear infrastructure in order to put a nuclear bomb out of reach

OPEC’s decision to pump high oil output is a sure success

To hear OPEC ministers in Vienna, one would think the cartel's battle for market share is a complete success and oil prices are now firmly anchored where they are.

"The strategy is working... It will take time for markets to rebalance," was the mantra from OPEC kingpin Saudi Arabia's oil minister Ali al-Naimi and his peers.

However, the oil markets have probably become even less easier to read now than in November last year when OPEC launched its shock strategy of adding barrels to the already oversupplied market in the hope of winning back market share from higher-cost rivals such as U.S. shale oil.

Saudi Arabia crude oil exports decline

Saudi Arabia’s April crude exports fell by 161,000 barrels per day (bpd) as domestic refiners processed more crude, official data showed.

Exports fell to 7.737 million bpd from 7.898 million in March when they hit their highest levels in almost a decade.

Domestic refiners processed 2.224 million bpd, up 315,000 bpd from 1.909 million bpd in March, figures supplied by Riyadh to the Joint Organisations Data Initiative (JODI) showed. (Reuters)

Libya’s fall in oil output is hurting state finances

Protesters at Libya's eastern port of Brega agreed a deal to end their strike, Libya's state-run Sirte Oil Co said, clearing the way for the Irda natural gas field to resume production.

Gripped by chaos four years after the ousting of leader Muammar Gaddafi, Libya's oil and gas sector has suffered a sharp fall in output, hurting state finances and causing power shortages.

Price Performance

In June’15, WTI and Brent crude oil lost its value by 1.38 and 3 percent respectively. WTI crude traded in the range of $5 making a monthly high of $61.82and low of $51.83 and closed at $59.47/bbl. Brent crude prices also traded in the range of $6 making a monthly low of $60.94 and high of $66.36, finally closing the month at $63.59/bbl.

Greece debt default and oversupplied oil markets were the major focus for oil markets last month. Let us assess the key developments in the oil markets and the price movement going forward.

Greece’s default jolts global markets

Greece, as expected, was not able to repay 1.6 billion Euros it owed to the IMF on June 30’2015, in what was the largest missed payment in the Fund's history. Greece's default pushed up the dollar versus the euro, with the stronger greenback pressuring crude prices as it increases dollar-denominated oil import prices for countries using different currencies.

Era of higher OPEC supplies continue

OPEC (meeting on June 5’15) has continued to stick with its November decision to maintain its collective production ceiling of 30 mbpd despite the glut of oil in global oil market. According to reports, Iraqi crude production climbed to a record level in June, with OPEC crude oil output estimated to have reached 32.1 million barrels per day against a target of 30 million barrels per day. Also, the extension of a deadline for a nuclear deal that will let Iran export more crude into an oversupplied market was also dragging on prices.

Oil rig count continue to decline in the US

The impact on US producers is fierce. The number of rigs in the US has dropped by 60% since last November, and 22 companies, with $33 billion of assets, have filed for bankruptcy protection, warned of insolvency, or deferred interest payments on bonds.

Steady decline in oil rigs is one of the key developments in the United States. In the period ended July 2, the number of rigs drilling for oil in the United States totaled 640, compared with 1,562 a year ago. Year-over-year oil exploration in the U.S. is down 58.2 percent.

Although, the growth in the oil production has been impressive, the International Energy Agency expects US oil production to plateau sometime in the middle of this year, at least if prices stay around $60 per barrel.

For consecutive eight weeks in a row, crude inventories in the US have been declining. The inventory withdrawal has been around 25.14 million barrels to 465.763 million barrels as on 3rd July 2015. Although, the demand side has been robust in the recent weeks on account of summer driving season, giving a boost to gasoline consumption, oversupplied oil markets from the OPEC as awell as Non-opec nations remains a cause of trouble for oil markets.

On the MCX, oil prices declined by 2.5 percent in June’15 and closed at Rs.3776/bbl. In the same time frame rupee appreciated by around 0.25 percent supporting the fall in domestic markets.

Crude Outlook

EIA forecasts state that OPEC crude oil production will continue to exceed, contributing to the expected continued global inventory builds.

Oil markets are also concerned about the speed with which Iran could increase oil exports if there is a deal between Tehran and six world powers over Iran's nuclear programme, a move that would lift Western sanctions.

Weaker U.S. refined fuels markets and potential negative impact from Greece's debt crisis on European energy demand will continue to pressure oil prices.

The world is still oversupplied with oil, and there are no obvious signs that this trend will reverse in the near future.

NYMEX crude oil (CMP: $53.7) prices can possibly move lower towards $50, while crude prices on the MCX (CMP: Rs.3400) can move lower to the extent of Rs.3200/bbl in the medium term.

Natural Gas

Natural gas prices on the NYMEX rose by around 7 percent in June’15 and MCX prices rose by 6 percent. In the same time frame rupee appreciated by around 0.25 percent.

Natural gas production in the United States is running nearly 7% higher in 2015 than it was for the same period in 2014. Shale production has driven overall production gains for several years now and has turned some states that produced essentially no oil or gas in 2008 into important producing states today.

Working natural gas in storage increased to 2,577 Bcf as of Friday, June 26. A net injection into storage of 69 Bcf for the week resulted in storage levels 35% above a year ago and 1% above the five-year average for this week.

The total oil and natural gas rig count increased by 2 units to 859 for the week ending Friday, June 26, according to data from Baker Hughes Incorporated. Oil rigs decreased by 3, down to 628. Natural gas rigs, however, went up by 5 units to 228.

U.S. natural gas consumption was down by 3.2% last month, led by reductions in gas demand for the power sector. Cooler temperatures in the Southeast, Northeast, and Midwest (three of the higher consuming regions) drove the overall decrease in natural gas for power generation.

We expect natural gas prices on the NYMEX to head lower towards $2.5/MMBTU (CMP: $2.69) while MCX NG prices can head lower towards Rs.155/MMbtu. (CMP: Rs.183).

Technical Outlook (For July 2015)