Mumbai: As in the case of many other industrial commodities, crude oil prices have been increasing over the last couple of months, spurred by investors flush with easy money. However, a sustained rise in oil prices will only take place when economic recovery in developed countries gains strength, says Kuljeet Kataria, vice-president of commodities at Motilal Oswal Financial Services Ltd. Edited excerpts:
Graphic: Paras Jain / Mint
The spread between the future and spot prices of crude oil, or contango, is shortening. What is driving this?
In recent sessions, we have seen crude prices trading broadly in the band of $70-80 a barrel on the Nymex (New York Mercantile Exchange). The rally towards $84 was not justified fundamentally as inventories are still at higher levels of above the five-year average and demand is still bleak in major consuming countries.
It’s the strong steps taken by economies worldwide to infuse liquidity that have created hopes of a global economic recovery and also a rise in (the) demand for oil. The hope, rather than real demand, was the major driver in the rally. (The) demand from non-OECD (Organisation for Economic Co-operation and Development) or developing, countries like China is continuing to pick up. Recently released February trade data said that China imported at the second highest rate on record on a daily basis.
However, OECD (developed countries) demand remains subdued, which can be seen from the Organization of the Petroleum Exporting Countries (Opec) monthly report that stated (that) demand would decline by around 150,000 barrels per day. In the short term, we expect prices will be weak and the contango can further shorten.
Do you see a situation where futures prices dip below spot prices (or backwardation)?
We don’t expect prices to move into sustained backwardation. Even though the rally in crude is slightly overdone, economic data worldwide is indicative of the fact that the major economies are on the recovery path. The US, the major consumer of oil, has witnessed a good recovery in the manufacturing sector. Unemployment remains the concern which will keep demand subdued for some time. We expect OECD demand will pick up slowly and steadily, which will put a floor on falling oil prices and eventually prices can move up to $88-95 a barrel. A dip towards the $75-68 band would be a good value zone.
The storage capacity for oil has also started coming down, say, some reports. Is that another signal that the oil market is tightening?
In recent times, storage capacity has come down mainly due to the maintenance season. Oil consumption is still weak. As explained earlier, the recovery in OECD demand is necessary for oil prices to sustain at higher levels. There is plenty of oil as consumption is weak in OECD economies. Opec compliance rates have also come down near 50% levels, which again is a signal that the markets are oversupplied. Global inventories are still above the five-year average, which won’t allow crude prices to sustain at higher levels.
What are the main factors that will determine crude oil price movement this year? In what way will the crude price movement different from that of other major industrial commodities?
The important driver that will determine crude oil prices this year will be the pace of global economic recovery. The price movement in crude oil will be (the) same as other industrial commodities in a way that real demand will be the important swing factor.