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Despite Low Demand, Crude Oil Prices Seen Rising

Currently, the global economy is witnessing a major slowdown and economies like China, Germany and India have reported declining factory output.

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Despite Low Demand, Crude Oil Prices Seen Rising

India imports over 80 per cent of its oil requirements.


Mumbai: 

Despite the lack of demand in the global markets owing to worldwide slowdown in economic activity, natural resource research firm Goehring & Rozencwajg (G&R) says that it expects oil prices to rise.

Typically, oil prices fall if there is a persistent lack of demand. Currently, the global economy is witnessing a major slowdown and economies like China, Germany and India have reported declining factory output.

The research firm in a recent note to investors said: "We remain bullish on oil prices and believe the second half of the year will see significant strength."

India is highly susceptible to fluctuations in the international oil market as it imports over 80 per cent of its oil requirements.

The G&R report said: "Although the International Energy Agency (IEA) believes the global oil market is in surplus, we vigorously disagree with their analysis. Both WTI (West Texas Intermediate) and Brent oil prices remain extremely backwardated and this backwardation has not decreased in the last 3 months.

"If market balances had loosened as much as portrayed by IEA (data since the beginning of 2019), we should have seen both WTI and Brent markets swing into contango, which has definitely not happened." 

Contango and backwardation, refer to the positions of future prices versus the current spot price, respectively, indicating that demand is greater than supply and that inventories are tight.

As per the report, the International Energy Agency (IEA) cut its oil demand growth estimates for the first quarter of 2019 to "only 310,000 b/d (barrel per day) y/y and they lowered Q2 growth to 800,000 b/d".

Goehring & Rozencwajg also pointed out that radical underperformance of energy-related equities versus oil prices was seen over the past three years. 

Since bottoming in the first quarter (Q1) of 2016, oil rallied over 125 per cent, they said, while exploration and production stocks are up barely 10 per cent and the oil service stocks are now down almost 30 per cent. 

"The radical underperformance of energy-related equities has produced tremendous value and we remain bullish on the group," the firm concluded.



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