The Crude Story: Supply-Demand Mechanics for Oil in 2018
- January of 2018 was a particularly interesting month for the global Crude Oil market: U.S. Crude Production hit its highest level since 1970, amidst record-levels of inventory drawdowns and continued production cuts maintained by OPEC. Given the direct relevance of physical commodities like Oil to the global economic and commodity complex, in this month’s edition of the Global Macro Outlook, we will look at how demand and supply factors and positioned right now in the Crude Oil market, and how global monetary policy plays a part in the pricing of the commodity.
- 2017 was a tremendous year for Crude: having tumbled to a low of $44.00 mid-year, prices went on a rally to multi-year highs of $60.00 by the end of the year. Driving this rally was an interesting confluence of macro factors: healthy demand growth for energy, OPEC production cuts at a high 95% compliance level, and quite importantly, persistent weakness in the US Dollar. Commodities like Oil that are priced in dollars tend to rally when the dollar weakens.
- In the last edition of the Macro Outlook, we outlined our macro thesis for a weak dollar in 2018 – and for all intents and purposes, monetary factors supportive of a weak USD will be bullish for Oil prices. On the demand side, we see from the CFTC’s Commitment of Traders report that most institutional funds are positioned long in Brent Futures. And Alaa Alyasri, acting director of Iraq’s national oil company, has also expressed his continued commitment to OPEC production cuts, amidst rumours that these cuts will persist into 2019.
- The positive macro sentiment for crude is nowhere more evident than in the price chart for WTI (‘West Texas Intermediate’) Oil Futures. We can see that in the past 7 months, price have stuck strictly within a positive channel with a strong upwards impulse. Key support levels to look at would be $62.45 (2015 high), below which the momentum is likely to falter. Conversely, if prices maintain their current trend, and macro factors remain supportive, we could see crude prices break the resistance of $70.01 within the year.
- On a long-term basis, things get slightly more interesting. Technological alternatives facing Oil as a transportation commodity remain a serious threat: it is estimated that improvements in efficiency and the rise of alternatives like Electric Vehicles are wiping out 450,000 barrels of oil a day. Long-term trends in Emerging Markets and China are also bearish for energy commodities like oil: as they shift away from high industrial levels of utilisation to more service-based economics, the energy intensity per economy lowers dramatically which is bearish for energy prices on the demand side of the equation. On this basis, we expect the long-term outlook for crude to be sideways within the normalised $50-$60 range as technological changes take over.
- This then poses the conundrum for those in the energy investors: an extremely-positive sentiment in crude oil in the near-term, alongside drastic technological and geopolitical factors indicating weaker crude prices in the long-term. Such imbalances are likely to create very interesting positioning opportunities for those interested, over the next few months.
Written by Nicholas Tan Wei Hong