Crude prices likely to stay in $70-80

Crude oil has declined 5.50 per cent on a year-to-date basis since the beginning of this calendar year. Worries over the euro zone have taken centre stage and affected sentiment across the globe. The `black gold? witnessed downside pressure as the sovereign debt crisis in the euro zone raised concerns over demand for commodities. Crude oil prices on the New York Mercantile Exchange (Nymex) are presently hovering consistently above the $75 a barrel mark.

According to Reena Walia Nair, research analyst at Angel Broking, ?Another factor that led to downside pressure on commodities was the strength in the US Dollar Index. Worries in the euro zone led to demand for the dollar index as a safe haven and this made crude oil prices, which are denominated in dollar terms globally, look expensive for holders of other currencies.?

She points out that the dollar index has strengthened more than 8 per cent this year and this has also become a crucial factor that led to selling pressure in commodities.

In May, crude fell by 14 per cent to record its lowest price since December 2008 due to market instability from the European sovereign debt crisis. Crude oil has escalated a bit in recent weeks, spurred by a decline in weekly oil inventories and improved sentiment provided by strong equity markets globally.

Greece's financial problems were spreading into the other European nations, which dragged down crude prices from a high of $87.15 on May 3 to $64.24 on May 20. ?After that, prices started recovering on China?s assurance about its euro zone investments, which was positive sign for the European economies,? said Basant Vaid, senior research analyst at Bonanza Commodity Brokers. Now the prices are running range-bound with a positive bias because the prices surged 10 per cent since the end of May.

A major issue that has been on the forefront is the BP oil spill. BP is being accused of taking risky and repeated shortcuts on its blownout Gulf of Mexico oil well. The spill has affected 120 miles of US coastline, end?angered a multibillion-dollar fishing industry, killing fishes and birds.

The Organization of the Petroleum Exporting Countries (Opec) is expected to keep its production targets largely unchanged this year. Countries such as Saudi Arabia, Kuwait and the United Arab Emirates have maintained their quota discipline at present levels for a long time period and may continue to do so. Crude oil production in Opec is expected to rise by 0.5 million barrels per day (mbpd) in 2011 as fresh capacity is being added in Angola.

Excess production capacity in the case of crude oil is not expected to rise in financial year 2011 from present levels.

?Global crude oil consumption is expected to grow by 1.5 mbpd in 2010 and the US Energy Information Administration (EIA) is expecting this consumption to rise to 1.6 mbpd in 2011. Main drivers of crude oil consumption are expected to be the Asia Pacific and the Middle East regions? Angel?s Nair added.

Going forward, the stress test of European banks will throw light on the health of the euro zone and is likely to have a major impact on crude oil prices. (Stress tests for banks in European Union, results for which came out late on Friday, showed that only seven banks including Germany?s Hypo Real Estate Holding, Agricultural Bank of Greece and five Spanish savings bank did not have adequate reserves to maintain a tier-1 capital ratio of at least 6 per cent in the event of a recession and sovereign-debt crisis.)

?As per present price structure, the counter has strong resistance at $79.6-80 a barrel and unless there is a crossover of the same on a closing basis, further upside seems unlikely and it might trigger a round of selloff and profit booking at these levels seems imminent,? Religare Commodites reported.

Technically, Anand James, chief analyst at Geojit Comtrade, says that crude could find immediate support at $74.5 a barrel and thereafter $71.5 a barrel; immediate resistance at $80.4 a barrel and thereafter $85 a barrel.

However Religare Commod ites says oil could find an immediate support at $76.5 a barrel and thereafter at $74.5 barrel; immediate resistance at $80 a barrel and thereafter $85.5 a barrel. On Friday, crude at Nymex was trading at $78.98 levels.

Source: Financial Chronicle, Delhi, 26 July, 2010
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