TSX May Open Higher As Oil Prices Rise

TSX May Open Higher As Oil Prices Rise

Oil prices held firm on Friday, with Brent crude up by more than 10 percent from its December lows on the back of political tensions in OPEC-member Iran and a tightening US market.

Oil and Natural Gas Corporation shares rallied more than 3 percent following further spike in crude oil prices and after a media report indicated that ONGC may pay Rs 45,000 crore for HPCL stake.

The higher pricing is nearly entirely due to the withdrawal of about 1.8 million barrels a day in global crude oil supplies resulting from the OPEC-initiated production cuts.

US West Texas Intermediate (WTI) crude futures were at $61.95 a barrel at 0151 GMT, 5 cents below their last close but not far off the $62.21 May 2015 high reached the previous day. A 10% rise in crude prices could increase CPI inflation by around 25 basis points if oil marketing companies were to pass on the full increase to consumers and if there is no excise duty cut.

Even though the political unrest in Iran is putting some tension upward in the market, Iranian sources mention no impact neither on the oil production nor on the exports.

"There's been a one-way, very steep and uninterrupted rally off the last minor low in mid-December near $56, so it won't be surprising to see a pause here", said Ric Spooner, a Sydney-based analyst at CMC Markets.

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OPEC and its partners chose to extend its production cuts till the end of 2018 in Vienna on November 30, as the oil cartel and its allies step up their attempt to end a three-year supply glut that has savaged crude prices and the global energy industry. This means United States supply is now close to parity with top producers, Russian Federation and Saudi Arabia, and, according to the IEA earlier in the year, will likely create a supply surplus in the first half of 2018.

Opec, supported by Russian Federation and other non-members, began to hammer out a deal to cut supplies again in 2016, aiming to lift prices by removing a glut built up in the previous two years. Domestic output bottomed at 8.55 million barrels per day in September 2016, down 11 per cent from the peak in April 2015, according to the US Energy Information Administration (EIA). However, rising USA production, which is on the verge of breaking through 10 million bpd, is somewhat hampering the outlook into 2018. Strong demand growth, especially from China, has also been supporting crude.

According to all these forecasts, the oil market balance will not be achieved before late in the second half of 2018, as US shale and growing supply from other non-OPEC producers not part of the OPEC-driven pact will offset some of the cartel and allies' production cuts.

But in doing so, the organisation risks tightening the market too much, sending prices sharply higher and encouraging a faster-than-expected acceleration in production from US shale producers. They agreed late last year to extend their cuts to December 2018, with the ultimate goal of reducing crude oil inventories in the OECD countries to the five-year average.

The decline today is "more related to profit-taking after a good week", said Giovanni Staunovo, a commodity analyst at UBS Wealth Management.

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