Crude prices have declined for 6 consecutive weeks and so is USD against Rupee. USDINR hit 74.45 on Oct 12th and since then Rupee has gained 5%. Since Rupee’s fortunes is now closely tied to Oil, it is important to know fundamental factors weighing on Oil price movement.
Confluence of factors have triggered Crude fall. Factors that contributed to Oil decline are 1) Saudi and OPEC increased Oil production without factoring Iran sanction exemptions given by US to 8 countries 2) US President called for lower Oil prices and Saudi obliged to keep him happy, 3) US President praised Saudi and has pressed for more Oil price reduction, 4) Slow down in Chinese economy and fall in demand and gloomy demand outlook, 5) Reports that Russia may not join OPEC to cut output.
Three major agencies, IEA (International energy agency), OPEC and US based EIA (Energy information agency) have all incorporated a gloomier outlook for demand/supply balance. All three agencies forecast rise in US Oil production.
EIA has forecasted that Global Oil demand will be 100 mbpd in 2018 and 102 mbpd in 2019. OPEC forecast is 98.79 mbpd for 2018 and 100 mbpd in 2019. IEA forecast is 99.2 mbpd for 2018 and 101 mbpd for 2019. On the supply side OPEC output is expected to be around 59 mbpd and non Opec output is expected to be between 62 and 63 mbpd.(total 121 mbpd as against 100 mbpd demand). Hence lower Oil demand and increased Oil capacity calls for steep OPEC supply cut and tight compliance. OPEC expects its members to produce only 32 mbpd. US is leading the growth in shale oil production in non OPEC oil supplying countries. US production is expected to be 10.9 mbpd in 2018 and then climb to 12 mbpd in 2019.
OPEC is meeting on Dec 6 th and is expected to cut supply by 1.5 mbpd.
The above fundamentals is highlighted only for understanding of present Oil supply/demand situation. Markets take a U-turn abruptly as it happened for Crude , when most analysts expected Crude to rise even further to US 100 in Brent. Similarly, geo political developments, and reversal in supply or demand situation can trigger a swift movement in the opposite direction. However, Crude is closely linked to Global economic growth. In recent weeks, OECD and IMF have revised Global economic growth lower in 2019 and 2020. Increase in financing costs and trade protectionism may apply brake on economic growth and keep Oil prices within acceptable limits. This is certainly a boon for India. But it is not clear whether relief in Oil prices alone may help Rupee as exports could be hurt if global economy slows.
If US and China makes peace on trade issues, Global growth outlook would brighten again and possibly support Oil prices.
Technically, USDINR is above 20 month moving average and hence a long term reversal is not yet triggered. Hence, Rupee gain can be used for fwd hedging of liabilities for upcoming months. At the same time, if Rupee is to decline again to 74+ levels, long term export hedging can be done through Options.
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