Weekly Commodity Idea – Oil
WTI crude continues to push higher, with this week’s new high prices adding to the previous 6 weeks of rising energy costs. The weekly chart shows price action is looking likely to test the 2018 highs of $76.88 per barrel, while the momentum as measured by the weekly moving averages is still showing continued bullishness. The WTI futures and options contracts have been pricing forwards towards the $100 per barrel, as reported in the Wall Street Journal.
Traders have alighted on what some believe to be a one-way bet in the world’s most important commodity market: oil prices going to $100 a barrel. They have scooped up call options tied to Brent and West Texas Intermediate crude-oil prices reaching $100 by the end of next year. Oil prices haven’t topped that milestone since 2014, when a gush of U.S. crude depressed energy markets.
Owners of $100 options—now the most widely owned WTI call contracts on the New York Mercantile Exchange—are making a leveraged bet that oil prices will hurtle higher after already surging more than 40% this year. The roaring rally, goosed by thawing coronavirus restrictions, has lifted WTI prices to their highest level since 2018 at almost $70 a barrel and average U.S. gasoline prices above $3 a gallon, according to GasBuddy.
Options $100 Calls of around 60,000 lots for December 2022 were the most popular in terms of open interest, now $110-$120 Call options are gaining popularity too.
The interest in higher than $100 per barrel is because demand is expected to rise while supply is still tightening. The below graphic shows the actual days of supply for the year 2019-2020 in brown and the current state of the market in blue. We are clearly more than 10 days below in terms of crude oil supply.
However, it should be noted that rapid price increases and spikes in energy costs have usually preceded major economic down turns. During the 2008-09 global recession, the price of Brent crude oil plummeted from around $150 per barrel in mid-2008 to around $40 per barrel at the turn of 2009. This 70% drop marked a reversal in the steep upward trend in oil prices that had started in the early 2000s. In 2020 during the latest economic crash, we saw contracts go negative in prices. If the demand was to be disrupted once more due to covid-19 variants the markets would find themselves in a good position at these current levels of supply.
It was thought that the proposed lifting of US sanctions on Iran and a Nuclear deal would have brought around 1mbpd of Iranian oil to market to help alleviate the tightness within the markets, but that is unlikely to happen now until the Autumn and after the Iranian elections.
Supply in the US was hampered by extreme weather conditions, from Hurricanes to the Big Freeze across the mid-west, and even Texas. More than 4 million barrels a day of output was at one point in 2021 offline. Oil refining centres drastically cut back output. These natural events plus a malware attack on the colonial pipeline have kept US stocks lower and hence we see a deficit of supply to demand.
The Commitment of Traders report shows that more non-commercial traders are adding to their long positions for the 3rd week in a row, as the long oil trade becomes more popular.
The energy markets are likely to be in deficit for the next half a year with OPEC+ calculating that they will need to up supply to meet the demand estimates. Across twitter today along with reasons for WTI to travel towards $100 per barrel, Russian comments on output changes are trending.
RUSSIAN ENERGY SOURCE SAYS GOOD TIMING TO FURTHER EASE OIL CUTS IN AUGUST DESPITE EXPECTED IRANIAN OIL EXPORT RETURN AS MARKET IS IN DEFICIT
OPEC+ are increasing production estimates to 29 million barrels per day (mbpd), from current levels where they are producing 25.5 mbpd (May) 26.3mbpd (June) to 27.1mbpd in July 2021 but will take each coming OPEC+ meeting with considerations to global demand.
As economies shift focus towards being more proactive in saving the planet with green initiatives and moving away from carbon, big projects in extracting oil will not get sanctioned, so the market will tighten even more over the coming years.
Demand for Gasoline in the USA currently stands at 9.3mbpd which is below the 5-year average of 9.55mbpd and there was a bit if excess supply from when Europe sent their gasoline to the USA during the adverse weather conditions. There could be a lot of pent-up demand as people may still decide to drive during the school holidays and get out of their houses, or at least work from a new location.
Distillate’s demand is growing due to increased Diesel usage, this is a turnaround from there being no trucks delivering, to many trucks on the roads as companies race to ease supply chain disruptions. Jet fuel is still less in demand due to the wider travel restrictions, so if that and Gasoline were to pick up then we could have enough of a catalyst to take prices above $100 per barrel.
On a daily chart adding a stochastic indicator could be a great way to continually buy the dip. Changing the default settings of the stochastic to:
Gives you a faster/more sensitive indicator, which if you wait for an oversold signal where the stochastic goes below the 30 level, you can see that there have been several times where the daily trend is confirmed higher by the 20,50 and 200 period moving average and the stochastic helps identify a buy the dip scenario.
Oil trades in these trends for fundamental reasons and keeping an eye on how well the draw on stocks is doing, which is effectively tightening the market until demand decreases, can help you pick the trend to follow. If you see that momentum is to the upside across the moving averages and you have looked at the EIA, IEA and OPEC+ reports, you should be able to work out whether or not supply is deficit to demand and whether trader sentiment is looking for higher prices. If prices were to somehow fall below the 200-period moving average I would be extremely wary of trying to catch a bottom in the oil markets having seen the cost of a barrel of oil go negative last year. Anything is possible.