Crude oil is an unrefined petroleum product made from hydrocarbons, and is the world's leading source of energy. The world's top five crude oil exporters include Saudi Arabia, Russia, Iraq, Canada, and the United Arab Emirates. Two-thirds of all oil contracts reference the Brent Blend, which originates from four different fields in the North Sea. West Texas Intermediate (WTI) refers to oil extracted in the US and sent via pipelines to Cushing, OK. WTI is primarily traded in the US.
Crude oil prices are currently flat. Both Brent crude and WTI are currently trading sideways. Yesterday, WTI prices moved higher (while Brent prices fell) following a bigger than expected drawdown in official US crude and gasoline inventories. Note that crude oil trading volumes on futures and options exchanges remain significantly below 10 and 20-day moving averages. Ahead of tomorrow's OPEC meeting, traders remain cautious. Today's WTI trading range is $63.60 - $67.20.
Looking at recent news, Iran signaled that it could agree to a small increase in OPEC production. Previously, the country had resisted all Russian and Saudi efforts to raise production. Given significant disagreements between members of the oil cartel, tomorrow's meeting is likely to be fairly tense. Earlier this week, various media outlets reported that OPEC is looking to raise production by 300k - 600k barrels per day.
Turning to inventory figures, US crude and gasoline inventories improved significantly over previous weekly figures. Ahead of the peak summer driving season, ongoing drawdowns in US inventories are a sign of strong demand. Thanks to accelerating US growth, the outlook for US crude oil demand is positive. Our outlook on crude oil remains neutral.
|June 15||Baker Hughes US Oil Rig Count||863||862|
|June 19||API Crude Oil Stock Change 15/JUN||-3.016m||0.833m|
|June 20||EIA Crude Oil Stocks Change 15/JUN||-5.914m||-4.143m|
|June 20||EIA Gasoline Stocks Change 15/JUN||-2.271m||-2.271m|
Supply and demand: Looking at the underlying fundamentals behind the crude oil market, demand growth continues to accelerate faster than supply growth. Thanks to both OPEC production limits and recent weather-related incidents, global crude oil supply has failed to keep up with demand. While many expected crude oil prices to remain permanently below $50 thanks to US shale, infrastructure bottlenecks and other resource constraints have kept shale supply at bay. Until supply overtakes demand, crude oil remains fundamentally supported.
Sentiment: After crude oil prices bottomed in the summer of 2017, sentiment has hit bullish extremes quite a few times. Looking at technical indicators such as the Relative Strength Index, crude oil has looked overbought both on the daily and the weekly chart in the fourth quarter of 2017 and early 2018. Based on the Commitments of Traders report, speculators have maintained big long crude oil positions starting in November 2017. Under typical conditions, the one-sided nature of the market would cause crude oil to pull back. So far, crude oil has managed to continue rallying despite fairly extreme speculator optimism.
Economic data: Forward-looking indicators continue to suggest strong global growth. As crude oil demand is correlated positively with GDP growth, the outlook for the commodity remains bullish. Growth is strongest in developed countries including the United States, the Eurozone and Japan. While Chinese crude oil imports hit all-time highs in 2017, the future outlook for Chinese demand is less optimistic thanks to an ongoing slowdown in Chinese lending. Slowing Chinese demand will ultimately weigh on prices once the slowdown accelerates. China replaced the United States as the world's top crude oil importer in 2017 according to customs data.
US Oil production may be accelerating, but crude oil remained a strong commodity throughout 2017. However, as supply growth is showing signs of catching up with demand growth - what does this mean for the crude oil forecast in 2018 and beyond?
Looking at the latest Commitments of Traders report, bullish extremes continue in long crude oil, long British pound and long euro speculator net positions. While long crude oil and British pound positions have grown, long euro positions have fallen this week. The purpose of this report is to track how the consensus is positioned across various currencies and commodities. When net long positions…
Speculators have been adding to their long crude oil positions - but what does history have to say about this commodity? These positions are now at an extreme, with the trade becoming more crowded and US oil production increasing, but can it keep rallying?