Unimaginable #5 Update: Oil Prices Approach $35? – I remain a lonely oil bear…

Powerful forces keep oil prices on an upward trajectory, but for how long? Weakening oil prices remains unimaginable. I remain a lonely bear…

One factor supporting oil strength is the weak US dollar.

The USD soared (inversed red line) until yearend after the Trump election and in 2017 simply fell even when oil weakened in H1 of 2017 and keeps on falling.

Source: Bloomberg

The current weak dollar trend does not fit the classic indicator of interest rate differentials, this aberration may have to eventually be corrected. The Euro USD and 10 year differential chart looks much the same as this one vs. Japan.

Source: @lomholt10, @Bjorn_Sillemann / WSJ-The Daily Shot

And another factor supporting oil is this current prognosis:

Goldman Sachs (GS) sees oil surging above $80 in 6 months (CNBC link)

  • Goldman Sachs raised its three-month Brent forecast to $75 and its six-month forecast to $82.50.
  • The bank says the rebalancing of the long oversupplied oil market has already occurred, about six months sooner than it expected.
  • Goldman credits “stellar” oil demand growth, OPEC’s deal to limit output and other factors for its outlook, saying many of those trends will continue.

The Brent-WTI spread is tightening as the post-Harvey congestion eases. It tightens as WTI catches up, but what happens when fears of over-supply return, the spread can narrow as Brent corrects. Oil is also a crowded long (traders and hedge funds are all fans), which might be reflected in GS’s prognosis, talking their book, cynically speaking???

The falling line reflects a narrowing spread between Brent and WTI oil prices. Brent typically trades at a premium to WTI.

Source: WSJ-The Daily Shot

Rigging The Oil Market: ‘Perhaps 60% of Today’s Oil Price is Pure Speculation’By F. William Engdahl Global Research, December 08, 2017 / Global Research 2 May 2008

“WTI has historically been more of a US crude oil basket. Not only is it used as the basis for US-traded oil futures, but it’s also a key benchmark for US production. *(see chart below)

“‘The tail that wags the dog’

“All this is well and official. But how today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of ‘paper oil.'”

*IAV: Industrial Production statistics are expected to rise as reflected in manufacturing PMIs and employment statistics

Chart US Industrial Production vs. OIL (oil bulls will see the need for oil catching up here)

Source: TradingEconomics.com

There is also the pending ARAMCO IPO which investment banks are drooling to get the mandate and manage it. Speculation is that the Saudis would like to see an oil price from $70-80 a barrel.

More and more supply!

The monthly oil production report from the Department of Energy placed the November US crude oil output at over 10 million barrels per day. This pace of production came much earlier than expected. This is on top of an unexpected rise in the API weekly crude oil stock!

Source: EIA; Read full article / WSJ The Daily Shot                     

The demand side is hardly discussed, because it doesn’t fit the bullish oil story. Efficiency gains and oil substitutes are also gaining significant ground. Incremental demand is coming from China and that demand is being satisfied by America’s incremental supply!

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