Friday , August 6 2021

Deja Vu in 2014: What's next for Oil Prices?


Last week, oil prices fell for eight months.

Brent and West Texas prices of crude oil prices were down 9.2%, or 12.3%, from their long-lasting October 3rd.

graphBrent's oil prices at YCharts

Last week, oil prices even hit the 8-month decline after they had dropped 17% from their record-breaking intra-day highs. It not only raises the level of nervousness (because the bad memories of the 2014 falls are still fresh), but also exacerbates pressure on a number of prominent players / debts in the energy sector (XLE).

There are three factors that play a role in this recent negative oil trend and not only have we touched on those, but also tried to answer the question in the title.


The supply of world oil derivatives (OIL, USO) continues to grow, crossing over 100 MMbbl for the first time since OPEC and Russia have recorded record results.

OPEC's 15-member OPEC paper reached a two-year height, while Saudi Arabia (KSA) and Angola compensated for the lower production level announced by Iran, ahead of US sanctions on the latter's strength this week.

Source: OPEC data for September 2018

According to the Bloomberg report, OPEC has increased its production to the highest level last November (October). The average paper production grew by 430,000 barrels of oil a day, making the organization produce daily at ~ 33.33M barrels per day.

Saudi Arabia is responsible for most of the increase in production, as it increased production in October by 150,000 barrels a day to 10.68 million barrels. It is the highest level of production since 1962!

Russia (RSX, ERUS) has achieved thirty years of oil. This is the highest level of production that Russia has ever recorded since the Soviet Union.

Let's not forget that the United States is now the world's largest oil producer, taking over Saudi Arabia and Russia for the first time since 1973.

The US today produces 11 million barrels of oil a day.

The result is for us the largest oil producer

However, too many offers are not the only factor that plays the role here.

Growth / Demand

Another factor is the side of demand.

Many signs point to a slowdown in the economy and, if that is true, it is expected to reduce demand for commodities (DBCs, GSGs) in general and oil in particular.

Remember that growth in Europe (VGK, EZU, HEDJ, FEZ) was lowest in the last quarter than the second quarter of 2014.

Meanwhile, the purchase price index released in the last few days in China shows that the second largest global economy slows (on the edge of the make-or-break 50 brand) and in some respects, eg new export orders, but contracting (under 50 reading ).

Image Result for china pmi Source: Bespoke Investment Group

Central Bank

Another factor that exerts price pressure on oil / gas prices is the reduction of central bank support. The easy-to-pay money period had two major implications:

1. Increase in real estate and commodity prices. Monetization policy alignment by major central banks – the US Fed on the one hand and the ECB in Europe, on the other – are now threatening to stop this party.

Since the Fed and other central banks are beginning to tighten monetary policy in an attempt to fight inflation, the chances of falling commodity prices grow.

Keep in mind that the fall in commodity prices in 2014 started a few weeks after the Fed released its latest redemption program.

2. Low US Dollar (UUP). The steady rise in greenery in 2018 begins to be toll.

graphUSO YCharts data

Technically speaking

Oil has recently broken the key levels of support and is now traded for over a year over its 200-DMA. The oil price also interrupted the growing narrowing trend line that began in early 2016.

Looking at the past decade, the current revision brings oil prices to an interesting assortment that looks like it has made or interrupted about $ 60.

XLE, an energy-monitoring ETF, trading is 15% lower than the 52-week high (reached five months ago). Actually, ETF dropped by 18 percent in October when it dropped from $ 78.36 (October 9, 2018) to $ 64.37 (October 29, 2018)

graphXLE data of YCharts

Is Sun setting on oil prices?

Recording the production level, the expected slowdown in global economic activity, and the tightening of monetary policy by major central banks, play a major role in the recent drop in oil prices.

The weakness of the capital market (SPY, DIA, QQQ, IWM) during the red October certainly did not help either.

Oil, Photo: Yizh

However, it is important to remember that sanctions on Iran – coming into force this week – will be affected.

Furthermore, if the US and China (MCHI, FXI) achieved a much-needed / anticipated trade agreement (or at least reduced trade-union tensions), the capital market – particularly commodities – will gain a big boost.

Despite the oil prices traded at about $ 11 since their recent ups and downs, it is important to note that the trend is still bizarre and that we are still seeing a "higher, higher rate" on a multi-year basis.

graphBrent's oil prices at YCharts

On long runs we remain bullish on oil prices because there are some major events / events that happen this month and suggest that we believe the long-term trend is still our best friend.

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