In the last month, crude oil prices gained over 11% on Nymex and over 13% on Brent due to estimates of production freezes by OPEC in September and rising demand from countries like India, China, and Russia. However, further upside is capped by slowing global economic growth forecasts. Natural gas production is expected to rise marginally due to low prices and declining rig activity, while demand is forecast to increase from the power sector. For both commodities, prices are expected to trade in defined ranges over the coming month.

1. Energy Monthly30th August 2016

2. Energy Monthly30th August 2016
Outlook
Crude Oil:For the coming month, we expect crude oil prices to trade higher on account of estimates for
freeze in the crude oil production by the Organization of the Petroleum Exporting Countries (OPEC). The
cartel and its members are due for unofficial meeting on 26th – 28th Sep’16. Further, rising demand and
estimates of rise in crude demand from India, China and Russia in near future will lead to upside in the
prices.
Additionally, economic growth from the US was steady at 1.1 percent for the June quarter hinting towards
a stable growth thereby sustaining the demand for the crude. With Chinese demand coming back into the
market and geopolitical tensions between Turkey and Syria along with war like situations between Iran
and US in the Strait of Hormuz in recent week will keep the oil prices in positive territory.
However, sharp upside in the prices can be capped as global economic growth is estimated to be slow for
the current year as well as next year. International Monetary Fund has cut its forecasts for global
economic growth to 3.1 percent in 2016 and 3.4 percent in 2017 as the unexpected U.K. vote to leave the
European Union creates a wave of uncertainty amid already-fragile business and consumer confidence.
The agency has cut its growth forecast for fifth time this year.
Moreover, reversal in prices can be seen as Saudi, which is the highest oil producer in OPEC and oil makes
up around 90 percent of the government revenues. The rout in the oil prices has led the kingdom with its
own set of problems as the price of Brent crude is roughly around $50 a barrel, less than half of what it
was in June last year. Despite the price fall, the kingdom continued to pump record amount of oil in the
hope of putting producers with higher costs out of business. The aim of the Saudi’s is to defend its market
share and hurt any number of rivals including Russia, Iran, or the US shale oil industry. At present, US is
producing around 9 million bpd while Saudi Arabia is producing around 10 mbpd and Russia is producing
at a rate of more than 10 million barrels per day, a record high since the breakup of the Soviet Union, and
is expected to keep output at that level in 2016.
According to reports, the cost at which shale producers can’t even break even is around $50 and
sustained price levels below the threshold mark will put shale oil producers bankrupt. That leaves many
shale producers in the US with have little or no profit margin. The low price of crude in turn has led shale
producers to cut the rigs in operation by around two third, from 1600 to 650 rigs at present. Further,
investors will maintain a cautious stance ahead of the Federal Reserve meeting in Sep’16 and any major
decision to hike the interest rates will have an impact on the commodity. For the month of Septmeber, oil
prices in the international market is expected in range of $40/bbl to $51/bbl and on the domestic front
prices are estimated in the range of Rs.2900/bbl to Rs.3400/bbl.
Natural Gas: Natural gas production is expected to rise marginally for the month of Sep’16 because of
low natural gas prices and declining rig activity. According to estimates of US Energy Information
Administration (EIA), production to rise by 1.0 percent to 79.58 in 2016 and by 2.3 percent to 81.38 Bcf
per day in 2017.
On the demand side, U.S. total natural gas consumption is expected to average 76.6 Bcf/d in 2016 and
77.8 Bcf/d in 2017, compared with 75.3 Bcf/d in 2015. This increase in natural gas consumption is mainly
on account of increase in usage of electric power. Natural gas exports by pipeline to Mexico is expected to
increase on account of growing demand from Mexico's electric power sector and flat natural gas
production in Mexico. For the coming month, gas prices in the international market is expected in range
of $2.60/mmbtu to $3.30/mmbtu and on the domestic bourses are estimated in the range of
Rs.180/mmbtu to Rs.220/mmbtu.

3. In the last month, crude oil prices gained by
more than 11 percent on Nymex, more
than 13 percent on Brent and around 14
percent on the MCX. On the domestic
bourses, prices rose more than
international markets due to depreciation
in the Indian Rupee.
As per the International energy Agency,
global oil demand growth for the first
quarter of 2016 was revised up to 1.4
million barrels per day, due to strong
demand from India, China and, more
surprisingly, Russia. For the year as a whole,
growth will be expected around 1.2 mbpd,
with demand reaching to 95.9 mbpd.
Moreover, Iran is sending positive signals
that it may support joint action to prop up
the oil market, as per the sources in OPEC
and the oil industry, which potentially aided
for the efforts to revive a global deal on
freezing production levels at talks which
will take place next month. OPEC's third-
largest producer has been boosting output
after the lifting of Western sanctions in
January.
Tehran refused to join a previous attempt
this year by OPEC plus non-members such
as Russia to stabilize production, and talks
collapsed in April. Though Iran has not yet
decided whether to join a new effort,
Tehran appears to be more willing to reach
an understanding with other oil producers.
Venezuelan Oil Minister Eulogio Del Pino
toured oil-producing countries including
Saudi Arabia and Iran to rally support for a
deal. Despite rising this year, oil at around
$49 a barrel is less than half its level of
mid-2014.
Members of the Organization of the
Petroleum Exporting Countries are due to
meet informally in Algeria next month on
the sidelines of the International Energy
Forum (IEF). Russia is also expected to
attend the meet. Venezuela, whose
economy has been hit hard by the oil price
collapse, has for months sought to rally
producers towards an agreement to limit
production. Russia, which in April was
ready to freeze production, now wants to
see an internal agreement among OPEC
before it commits to rejoining an initiative.
Tehran insists it will be ready for joint
action only once it regains pre-sanctions
output of 4 million barrels per day (bpd). It
pumped 3.6 million bpd in July, according
to figures reported by OPEC in its latest
report.
Energy Monthly30th August 2016
11.46%
13.23%
14.09%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Nymex Crude Oil ($/bbl) Brent Crude Oil ($/bbl) MCX Crude Oil (Rs./bbl)
Crude Oil Performance in Aug'16 (%)
Source: Bloomberg

4. Besides Iran, output levels in Nigeria and
Libya could also complicate reaching a deal.
While Saudi Arabia, Iran and Russia have
reached record production since April,
Nigeria's hit its lowest in more than two
decades due to attacks on oil sites. Libya is
pumping a fraction of its pre-conflict rate.
U.S. Navy ship fired three warning shots
after an Iranian fast-attack craft
approached two U.S. ships in the northern
Gulf on 24th Aug’16. The United States had
reported another incident where it said
Iranian vessels harassed a U.S. warship near
the Strait of Hormuz for the week on 19th
Aug’16.
Upside in the prices was seen after Saudi
Arabia Energy Minister Khalid Al-Falih
stated that any significant oil market
intervention was necessary as demand for
crude was "picking up nicely" around the
world.
Further, gains in the prices continued due
to falling inventories in gasoline and
distillate but rising inventories of crude oil
capped sharp gains in the commodity. It is
shown in the adjacent charts.
In the current context, the US inventories
are showing signs of withdrawal. It rose by
2.5 million barrels for the week ending on
19th Aug’16. Crude inventories have
jumped for around seven consecutive
weeks in a row.
Energy Monthly30th August 2016
200000
210000
220000
230000
240000
250000
260000
270000
Weekly US Gasoline Inventories
110000
120000
130000
140000
150000
160000
170000
Weekly US Distillate Inventories
350000
370000
390000
410000
430000
450000
470000
490000
510000
530000
550000
Weekly US Crude Oil Inventories
Source: Bloomberg

5. Nymex natural gas prices declined by more
than 1.5 percent for the month of Aug’16
on account of weak summer demand and
more warmer than normal temperatures
which led to decline in demand for the
commodity. On the domestic front, prices
dropped around 1.76 percent in the last
month.
For the current year, refill season showed
stocks well ahead of recent injection
seasons. Cumulative net injections into
working gas totaled at 561 Bcf so far in the
2016 refill season, compared with the five-
year average of 731 Bcf and last year's tally
of 936 Bcf during the same period. Despite,
injections smaller than in previous years,
working gas stocks remain near record
highs for this time of year.
According to 17th Jun’16, the natural gas rig
count in US stood at 85 when compared to
a year ago where in the rig count stood at
223, a total decline of around 137 rigs. The
highest gas rig count of 1606 in the US
stood in 2008. However, the efficiency of
the rigs has increased leading to
sustainable production of natural gas.
Energy Monthly30th August 2016
-1.63%
-1.76%
-1.80%
-1.75%
-1.70%
-1.65%
-1.60%
-1.55%
Nymex Natural Gas ($/mmbtu) MCX Natural Gas (Rs/mmbtu)
Natural Gas Performance in Aug'16 (%)
Moreover, rising inventories in the gas is
keeping pressure on the prices. The same
can be seen in the chart below. Gas
inventories has been in the positive
territory for the three consecutive weeks
indicating towards slowdown in demand.
Electric power sector, Residential sector
and industrial sector are the highest users
of natural gas in the US.
According to EIA, residential consumption
during the Nov’15-Mar’16 withdrawal
season averaged an estimated 21.0 Bcf per
day. This compared to 24.9 Bcf per day last
year and a five-year average of 23.5 Bcf per
day which clearly signals towards the
declining consumption in the residential
sector.
At the start of the winter season, the
absolute natural gas inventory in storage
stood at around 3634 Billion Cubic Feet
which was at end of the heating season on
31st Mar’16 stood at record highs of 2478
BCF. This is 868 Bcf (54%) higher than the
five-year average (2011-15) in March end.
(300.0)
(250.0)
(200.0)
(150.0)
(100.0)
(50.0)
0.0
50.0
100.0
150.0
US Natural Gas Inventories
Source: Bloomberg
Source: Bloomberg

6. SEBI Certified – Research Analyst www.choiceindia.com
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Energy Monthly30th August 2016
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Anish Vyas
Digitally signed by Anish Vyas
DN: cn=Anish Vyas, o=Choice Merchandise
Broking Pvt. Ltd, ou=Sr. Research Associate,
email=anish.vyas@choiceindia.com, c=IN
Date: 2016.08.30 14:42:14 +05'30'