Edelweiss's Crude Oil Monthly Review: April 8, 2012

Crude oil futures fell almost 4 percent and settled at $103.02 for the month March 2012. Oil prices witnessed very range-bound sessions throughout the month, trading in the range of $108-$105 after making high of $110 at the start of the month.

The mixed economic data and record supplies kept oil prices under pressure with the news of oil release from Strategic petroleum reserves from EU and US which dragged oil prices towards $103 in the end of the month of March – 2012.

Medium Term, One Month View: Sideways To Down

Crude oil prices are expected to trade down witnessing correction on high inventory levels with the end of winter season as refiners will go for maintenance shut before the summer season accelerates.

US commercial crude oil inventories rose to 20 months high to 353.4 mb in the week ended March 23 creating huge pressure on prices. The recent oil discoveries in shale assets have increased domestic supplies reducing oil imports of the US. OECD industry stocks increased by 13.6 mb to 2614 mb in January 2012 with the forward demand cover of 57.8 days.

The ongoing geopolitical concerns on Iran and Westerns countries will keep the risk premium in oil prices limiting the downside.

The Brent – WTI spread has widen to near $20 in March 2012 from $16.50 in February 2012 which is also signaling a downtrend in the oil prices.

Long Term, Three To Six Month View: Bullish

The steady economic recovery with positive manufacturing and industrial data may support oil prices in long term. The improved US job market and reviving housing market is signaling strength in US economy. The EU LTRO may also support strong Bull Run with liquidity injection.

Crude oil prices are expected to trade up on higher summer driving demand in the traditional summer season of ‘April-June 2012’ with higher refinery run.

The increase in supply with higher demand is signaling a new supply-driven bull market for crude oil futures in long term. Global oil demand is expected to rise at 89.9 in 2012 aginst 87.8 mb/day in 2011.

OPEC production has reached near 30.60 mbday with gradual recovery in oil production from Libya after the new output quota lined in the last OPEC meeting in December 2011. The OPEC is currently having spare capacity of 2.54 mb/day.

Technical View

Technically, NYMEX Crude Oil prices have breached important support of $103.40 reversing the previous month’s recommendation of buying on weak fundamentals. The trend line breakdown and sustainable trade below $103 may drag oil prices towards $98 levels. We expect oil prices to decline in short term with the support of $101 and $98 with resistance at $108. At MCX, crude oil prices are expected to trade down with support of INR5110 and INR4980 with resistance at INR5330 and INR5460.