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Crude Oil price forecasts always seem to garner a great level of interest – probably because Crude oil is such a critically important commodity. Whether it is for generating power, transporting our goods or as an input in manufacturing, there is no getting away from it.
Energy and especially Oil, is deemed as having a relatively inelastic demand – there generally aren’t big swings and sudden changes in demand, especially where price is concerned. Think about this from your own personal consumption – do you drive less, when petrol prices are higher? Probably not!
Equally, global demand is relatively steady – albeit increasing, as we see continued global growth and the emergence of newly industrialised economies on the global stage. China’s insatiable appetite for raw materials and commodities is certainly set to continue and Oil is another stat to be gobbled up! China’s energy use has doubled over the past decade, now overtaking the US (which has remained relatively flat, from a energy usage perspective) as the World’s largest energy consumer. A staggering shift on an unprecedented scale. Let’s have a look at our Outrageous Oil Price Forecast 2014.
Global growth is also likely to push higher, in the next 18 months, arguably led by a European and US economic recovery – and as such, demand for energy will also pick up, as the two go hand in glove. This will provide support for energy prices and of course, crude oil. So if demand doesn’t contain too many surprises, supply must be a bigger issue when it comes to establishing a view on oil prices.
One of the new variables to consider is the “fracking” phenomena that is underway, particularly in the US. This is where previously non-commercial fields are continuing to produce hydrocarbon, through new technology. Horizontal drilling has opened up the ability to extract gas from shale previously inaccessible and is resulting in cheaper energy and, plenty of it.
As a consequence of this trend, the US is now at a point where it is more than self sufficient for Oil again, as well as effectively being an exporter of petroleum products. This is a massive game changer. For the first time in decades, OPEC’s grip on oil prices may be slipping, as fracking sourced energy hits the market.
Traditionally, Middle Eastern tensions, conflicts and unrest have also formed a major part of the view, when it comes to energy forecasting. This remains the case – a major flare up in this part of the World, or even the prospects of a flare up and prices can jump dramatically. This is a story which has been played out many times in history, with Syria, Libya and Egypt being more recent examples.
Other geopolitical developments in the region look more positive. Iran, for example is seeking to mend relations with the rest of the World, and in particular, the US, following a breakthrough in relation to its alleged nuclear program. This may pave the way for increased oil supply from this source.
Ultimately though, the US’ new position with its self sourced hydrocarbon is an as yet untested game changer, when it comes to smoother oil prices, particularly when looking at the supply side.
Our expectation for 2014 is to see a stabilisation of pricing in the Crude oil space, as supply side changes are digested by the markets (Iranian and US sourced). Equally, with US self-sufficiency on the demand side, stronger global growth and of course Chinese demand, there will always be strong support.
As such, energy prices, from our perspective, are likely to remain in a reasonably stable range of $92 to $102/barrel for WTI – proportionally more for Brent – somewhere in the $8-$12 range higher.
Now, that all said, when we look at oil prices, what are we looking at ie which one? The major two are WTI (West Texas Intermediate) and Brent Crude. WTI is the benchmark on the NYMEX exchange, and is a lighter, sweeter (less sulphur) oil, while Brent is traditionally derived from North Sea production, and traded on the Intercontinental Exchange (ICE).
The price or spread between the two primary crudes has been an interesting trading area in itself, and arguably forms a less speculative trading opportunity than that of simple direction trading. Typically, Brent trades at a slightly higher price than WTI and as a trader, trading this pair has a number of merits.
Let’s say you expect this spread to come in – you short Brent and go long WTI. Effectively you are market neutral, when it comes to the overall direction of crude oil, but instead are looking to profit from a narrowing in of the spread between the two benchmarks. Alternatively, if your view is the opposite – you go long Brent and short WTI, profiting from the expansion of the spread.
Food for thought, I am sure and represents a potentially lower risk way of trading the energy space and one that provides the opportunity for a better trading outcome. Try this as a way of analysing and trading this – put your Bollinger bands on the spread itself and trade it back in on break out. Good luck and enjoy a new strategy!
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