I‘m feeling more bullish than bearish towards oil; I‘m not saying that because I can predict where the price of crude will go. I’m feeling bullish simply because the long-term outlook for crude appears to have asymmetric upside potential.
Short Term Factors Affecting Crude Oil Prices
On close examination, there are a variety of short-term factors that are moving the crude market at the moment.
“Saudi Arabia wants crude oil prices to rise to around $60 a barrel this year, five sources from OPEC countries and the oil industry said. This is the level the OPEC heavyweight and its Gulf allies – the United Arab Emirates, Kuwait and Qatar – believe would encourage investment in new fields but not lead to a jump in U.S. shale output.”
Notably, investors have expectations that the present global over-supply will be curbed by the output cuts agreed upon by the Organization of the Petroleum Exporting Countries (OPEC) and other major oil producers. The agreement that was announced in November was designed to cut output by about 1.8 million barrels per day in an effort to reduce the global glut that had kept prices low for the last 2 years.
Among the other factors influencing crude’s prices is the expectation that the rebound in U.S shale production could put downward pressure on oil prices. Data from oil field services giant, Baker Hughes shows that the number of rigs in operation has been steadily increasing over the past months. This could derail efforts by other suppliers to cut output.
Aside from shale, there is also a danger that other non–OPEC oil suppliers like Russia, China, Canada and, Mexico could increase their supplies in the months ahead; neutralizing the production cuts announced by OPEC.
Short – Term Bullishness in Oil
Whether you are long or short in oil there is money to be made as the commodity is highly volatile and heavily traded.
“Global demand for oil continues to pick up as recent measures to rebalance the market have come into play, but a period of sluggishness is still expected to hang over producers in the year ahead, according to the latest report by the International Energy Agency (IEA).”
Global demand has been upgraded for 2017, with stronger than anticipated demand expected from Europe, China and India as per latest data released by OPEC and IEA.
“While OPEC is leading an effort by global producers to clear a glut this year by reducing output, the organization is getting ready to meet rising demand in coming years. Iraq is rehabilitating its oil industry after years of conflict, while neighboring Iran is seeking foreign investors after the lifting of nuclear-related sanctions.”
Additional IEA data shows that OPEC itself has achieved a record 90% compliance with the agreed output reduction and that the demand for crude grew faster than expected over that period. OPEC compliance with its production agreement is driven by the production heavyweight, Saudi Arabia. The oil production giant alone has exceeded its promised reduction by 70,000 barrels. Angola and Qatar also cut more than they had promised.
As a consequence, world oil inventories is likely to fall by 600,000 barrels a day during the first half of the year if OPEC sticks to its deal .
Also positive for oil prices is the decline in global inventories over the past 5 months despite increased output from shale.
“Major oil producers have started cutting output but the rally in crude prices could be capped as U.S. shale companies boost production in the latter half of the year, according to JPMorgan.”
It should be noted that shale producers have hedged their oil price risk for the period 2017and 2019 at above $ 50 a barrel as per data released by hedge funds and institutions which have a focus in the energy segment and this has been reiterated by Hudson Field LLC, the boutique oil merchant firm.
This means that they expect prices not to break below the $ 50 mark in the months to come.
How Crude has Moved in the Past Weeks
On Friday February 10th oil prices rose after reports showed that OPEC members delivered more than 90% of the delivery cuts they had promised.
Oil has risen more than 20% from its low of last year indicating a bull market and is currently trading in a narrow gap between $50 and $54 a barrel.
US crude stock data is released every Wednesday and tends to move prices in either direction depending on the data. On Feb 8th the data showed that US crude stockpiles dropped by 2.5 million barrels to 21.1 million. This may foretell further bullishness ahead.
There is a formation of Doji candle in the charts. Confirmation of a bullish trend may be seen above $54.2. Above $54.2 we can expect a sharp move up to $56 to $57. We can expect next trend reversal only below $51.8.
Holding above $51.8 is critical for a continued rise. Immediate support is seen at $52.40, and a break below could take it to its key support level of $51.8
$60 Crude Oil in the Near Future?
Crude oil futures are trading in a narrow range from $50 to $53. This narrow band has been present for the past 6 weeks. On the lower side $51 seems very good support.
My best estimate is that prices will break the $54 levels and will move upward to test $57 shortly and there after up to $60.
There are mixed economic signs of bullishness and bearishness.
On the upside US and Chinese economies continues to expand. The annual GDP growth rate in China is expected to be 6.70% by the end of this quarter, according to Trading Economics global macro models and analyst expectations. Reflecting the economic growth, China National Petroleum Corporation said that the country’s crude imports will rise 5.3% to 396 million tonnes in 2017.
Looking States-side, US economic outlook appears healthy, with a GDP growth rate expected to come in between 2 to 3 %; an ideal range. The unemployment rate appears normal. President Trump has promised to increase economic growth to 4%; increasing GDP growth by an additional 2% in 2017.
Investors are also focused on the latest monthly report by OPEC. Oil has been trading lower despite signs that major oil producers are adhering to their production agreement.
Goldman Sachs oil and gas team expects US production to rise by nearly 600,000 to 700,000 barrels of oil per day between the fourth quarter of 2016 and fourth quarter of 2017. The investment bank expects the US production will erase production declines reported over the past 12 months by the end of the year despite the fact that many of the shale producers went out of business when the crude oil markets crashed.
Would I be Long or Short in Crude
I would say the odds are in favor of long trades.
Investors are taking long positions in the market anticipating further rise in prices. For investors low crude prices offers a very good buying opportunity. Once the prices start to rise, there will be more investment and this will have a cascading effect, pushing prices still further.
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