Hedge Funds Banking on Increased Demand for Petroleum Products

Dwayne Harmon
May 31, 2018

Those efforts paid off, with prices rising to as much as $80 a barrel, or approximately $3 a gallon in the US -a 25% increase from past year and the highest since 2014.

This past week, however, it was not crude oil and products that provided the gains.

Russian Federation and Saudi Arabia would not like the prices to jump from the current $75-$80 to $100, he said. This comes at a time when Venezuela is suffering from a production breakdown and uncertainty looms large on supplies from Iran. The price of oil is rising due to a supply problem, even of shale oil, largely produced by the U.S., which has also become one of the largest oil producing nations in the world in the past five years. Opec and his nation do not plan to stick to existing output cuts, he said. Potential opposition from several producers could complicate the group's effort to reach a consensus when it meets next month in Vienna.

"There could be 4-5% increase in prices across the sector in the next two quarters if crude prices remain at existing levels", said Saugata Gupta, MD of Marico, the maker of Parachute hair oil and Saffola cooking oil. Since then the black stuff has lost more than another dollar in electronic trading to trade at $66.69 Monday morning. Although US oil exports hit a record high of 2.6mn bpd in the middle of May, there is concern that the US port infrastructure has insufficient capacity to support the increasing supply. It confirms our view that while funds must react to short-term price developments the limited exposure seen now could act as the engine that takes gold higher once the technical outlook improves enough to warrant buyers to return. Any decision regarding boosting oil production could come as soon as the next cartel meeting on June 22.

Brent now commands its largest premium over US futures in more than three years, meaning USA exports are rapidly becoming far more competitive globally than those from northern Europe, Russia or parts of the Middle East.

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Both are light, sweet crude oils although WTI is generally sweeter and lighter than its European counterpart.

"We had a surprise rise in the rig count after a period where there's been some speculation about bottlenecks in USA production limiting the prospect of further output increases", Pedersen said. This is because the falling oil output from crisis-hit Venezuela has in reality increased the production cuts to some 2.7 million barrels per day, Russia's energy minister has said.

However, investors' fears about plunging oil prices may be unfounded, since cutting production by one million barrels per day would not, in reality, create such a big surplus.

The timing of the new regulation will coincide with the effect on supply from the underinvestment during the oil price crash and the strength in demand, suggesting that the "era of "lower for longer" oil prices is dead", Energy Aspects' Sen and Yasser Elguindi wrote in a commentary in the Financial Times this week.

"The market has not appreciated yet the degree and scope of these changes", Joswick said.

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