Crude Oil: Where the Prices can go?

Photo: Market Watch

What the heck happened to oil prices? But more significantly, what does it mean for the broader stock market and the global economy?

That is what has some Wall Street investors scratching their noggins, as crude futures and U.S. stocks staged a tandem tumble this week, just when investors thought the worst was over following a bruising October for risk assets. 

The near WTI futures price is down 23% since peaking on October 3rd as traders front ran the Iranian oil sanctions, which went in to place this week.  Fearing spiking oil prices, the U.S. granted waivers to eight of Iran’s largest buyers of crude – China, India, South Korea, Japan, Italy, Greece, Taiwan, and Turkey.

According to a report in the Economic Times, The oil bears are back, and they’re looking at OPEC before making their next move. While money managers slashed bets on rising West Texas Intermediate crude prices for a ninth week in their longest retreat on record, short-selling jumped to the highest in more than a year. The rapid shift in sentiment sets the stage for an OPEC meeting on Sunday to discuss market conditions. 

Now let us fathom a bit more:

Bulls: 

#Bottom might be near for crude. WTI’s 14-day relative strength index is below 30, a level marking

Photo: Live Mint

oversold territory.

#Iran supplying less crude.

#Declining production in Venezuela and risks in countries like Libya and Nigeria.

#Winter demands should keep the price of Crude Buoyant.

#If oil isn’t the undoing of this current bull stock market or a reflection of a souring economy, some market participants believe that one way or another, the end is nigh.

#OPEC kingpin Saudi Arabia believes the energy market has over-corrected in recent weeks. It comes as the world's top oil exporter grapples with a sharp drop in crude prices, amid cooling supply fears about the impact of U.S. sanctions on Iran.Saudi Arabia's energy minister also said the wider OPEC and non-OPEC alliance would not shy away from another round of production cuts over the coming weeks — if the group decided there was a need for such action.

#According to Ashray Ohri of ICICI Bank Ltd, “While a further fall may be warranted based on US’s temporary exemption on Iran and demand concerns, we believe oil prices are more likely to move to the upside as Iran exports get depleted further.” Having said that, is $80 a barrel on the horizon?

We believe a Brent rebound above the $80 a barrel level is less likely based on the current fundamentals and more responsible statements made by the US administration,” wrote Ohri in a report on 6 November. “As such, we expect oil prices to trade around the $75 a barrel mark and average $77 a barrel in the fourth quarter of this year, before cooling further to average $75 a barrel in Q1 2019.”

Bears:

#The net-long position in Brent dropped 15% to 260,048 contracts, ICE Futures Europe data show.

Longs fell 11%, while shorts rose 8%.

#Money managers cut their net-long positions on benchmark US gasoline by 8.2% and cut net-longs on diesel by 13%, according to the CFTC. 

#OPEC production at the highest since 2016.

#Record US output and waivers given to a number of importers of Iranian crude, including China. 

#Very large monthly down moves in crude oil has often heralded something more ominous.

Photo: Oil Price.com

# Few market participants believe that crude’s current downturn is a reflection of global economic weakness and precursor of something more pernicious to come, like a recession.

#Some market participants believe that  believes that the decline oil may fuel hedge fund selling and catalyze further pain for equity owners.

#Friday’s reading of U.S. wholesale inflation in October represented the biggest increase in six years and affirmed to some that the Federal Reserve would lift interest rates for a fourth time in 2018 next month and perhaps thrice more in 2019. That fact, combined with a slowdown in China’s economy and the hand-wringing around the Beijing-Washington trade dispute, have led some strategists to believe that the market is heading for a bear-market slide.

#There are reasons to be cautious about future returns: the growth/inflation mix is deteriorating and markets often have a sharp correction followed by a sharp rally prior to a more sustained bear market,” Goldman analysts wrote.

#According to Goldman, its indicator at 73% marks the highest bear-market reading since the late 1960s and early 1970s, which (with a few exceptions) is consistent with returns of zero over the following 12 months. Any reading above 60% signals that subsequent returns will be lower.

Meanwhile, Saudi Arabia's Energy Minister Khalid al-Falih told CNBC on Sunday: "Markets get it wrong occasionally as they did a few weeks ago on one side and they're doing it again on the other today, but ultimately the pendulum will swing to a reasonable middle". 

Testing Key Levels:

After bottoming below $42 on June 1, 2017, WTI’s 2-year uptrend has been violated and now testing critical Fibonacci retracement levels.  It has already sliced through the .382 at $63.32 and is now set to test the .500 at $59.12. The next key level is the .618 at around $55, which, if broken, it significantly increases the risk of giving it all back.

Of course, much also depends on the stance that the Organization of the Petroleum Exporting Countries and its friends take on production cuts. For now, lower crude oil prices are good news for us, as India imports a huge portion of its oil equirements. Lower prices benefit the country’s current account deficit and ease pressure on the rupee. For many corporates too, easing crude oil prices will bring some relief on the costs front.

 Sources:

#Market Watch

#The Economic Times

#OIL PRICE.com

#CNBC

#Live Mint