FX COMMODITIES
that the supply glut was finally coming to an end. Further confirmation of this can be found in longer dated futures contracts towards the end of 2017 and 2018. Te spread has narrowed dramatically as the market is slowly shiſting from contango to backwardation.
Te problem with skewed positioning to the long side is that
the market
is prone to a sharp correction to the downside. Te pace of new buyers slows and the market begins to question the elevated price. Tis is exactly what Brent Crude (Brent) and West Texas Intermediate (WTI) experienced in mid-March. Both benchmarks rallied around $10 as funds bought into the production cuts. Te rally stalled as new buyers were not prepared to bet against U.S. shale plays and longs were liquidated. Tis is a cyclical move, being one of a series of shorting cycles throughout the calendar year. Te market merely got ahead of itself and is simply finding a balanced position towards the long side. A sustained move above the key $50 mark and potentially up to $60 will come from strong gasoline demand within the U.S. and globally. The demand for gasoline in the U.S.
32 FX TRADER MAGAZINE April - June 2017
Saudi Arabia’s intention is to get the oil price to $60 a barrel
pump for the U.S. summer driving season pushes the price of crude to the upside. Current inventory data shows gasoline stocks moving towards the 10 year median. Total crude oil stocks remain well above the 10 year
average. However, a
consistent weekly reduction in total crude inventory builds and a series of drawdowns combined with gasoline stock drawdowns throughout the year will get the bulls buying. Globally there is strong growth for gasoline and crude products from India. As China continues its transition from a purely manufacturing centered economy to encompass both a service sector. Demand for crude may decline or remain stable, but gasoline is set to
is a key driver for the oil market starting in earnest in April, peaking in June / July and waning towards September. Strong demand at the
grow as an emerging middle class seek to acquire the trappings of their western counterparts. Overall, the demand side of the equation looks stable to strong for 2017. As long as the supply side is controlled, oil should stabilize and slowly find e q u il ib r ium around the $50 mark for the year.
The battle between OPEC, non-OPEC and U.S. shale plays which came to a head in November 2014 and culminated in sub-$30 oil last year is here
to stay. The U.S. has gone from being a net importer of crude to an exporter and swing producer. Tis is the narrative that will persist for the rest of the decade.
This year will see this dynamic play out under stable conditions with OPEC ensuring the market does not panic to the downside and U.S. production putting cap on exuberance to the upside. Money will be made this year following this logic. Buy crude in the $40’s and sell in the $50’s.
Michael Stapleton
Crude Oil Market Analyst Oil Pips
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