PETROANALYSIS || ARTICLE

WTI: short-term upward trend to continue

Published on

October 14, 2018

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Article by

Hermes Pérez

In 2018, the West Texas Intermediate crude has shown a clear upward trend throughout the year. In this regard, as of October 12, WTI averages US $ 67.2; 32% higher than 2017 (US $ 50.85) and above in 55% of the value of 2016 (US $ 43.47). Among the elements that explain the aforementioned rise are:

• A solid demand for crude oil in the world,
• The fear of the impact of a trade war between the United States and China,
• The possibility that US sanctions on Iranian crude will reduce the global supplies,
• Massive purchases made in the financial markets in the face of growing geopolitical tensions and
• The collapse of production in Venezuela, among others.

In 2018, WTI averages US $ 67.2. Up 32% compared to 2017 (US $ 50.85).

A solid demand for crude oil in the world.

According to the Short-Term Energy Outlook published by the U.S. Energy Information Administration, total world demand stood at 99.8 million barrels per day in 2018 (September), above 1.2% of the value registered in 2017. In the same way, the demand for crude oil was higher than the supply in 2018 (99.4 mbd), 300,000 barrels per day. This is in response to the solid growth experienced by the world economy this year.

The fear of the impact of a trade war between the United States and China.

This year has been characterized by growing commercial tensions between the United States, which has raised tariffs on Chinese products, while the Asian country has taken similar measures. According to the International Monetary Fund, the aforementioned trade struggle could reduce the growth estimates by one percentage point.

The possibility that US sanctions on Iranian crude will reduce the global supplies.

In this regard, exports from Iran have declined +/- 30% as a result of the measures imposed from Washington.

Massive purchases made in the financial markets in the face of growing geopolitical tensions.

Growing trade tensions between the United States and China, coupled with threats of sanctions against Iran, have spurred massive purchases of crude oil in financial markets (long positions).

In this sense, hedge fund managers have accumulated a long net position of futures and options equivalent to more than 850 million barrels, it is the largest since late July. There are increasing bets that Saudi Arabia and its allies will have the capacity to replace all the crude from the market when US sanctions on Iran go into effect fully from November.

Hedge funds and other money managers increased their position in the major petroleum contracts by another 75 million barrels in the week to October 08. Portfolio managers raised their combined net long position by a total of 196 million barrels in September, according to exchange and regulatory data. Bullish long positions outnumber bearish short ones by a ratio of more than 13:1, and the imbalance is rapidly closing in on the record 14:1 back in April.

In this sense, everything seems to point out that investors in the financial markets anticipate a shortage of light sweet crude as U.S. sanctions on Iran go into effect on Nov. 4. This is in spite of claims made by Saudi Arabia, Russia and the United States that the supply of crude oil will remain at adequate levels.

The collapse of production in Venezuela.

For its part, Venezuela has stopped producing 1,000,000 million barrels a day in a period slightly longer than a year, an unprecedented fall in a country without a military conflict. According to the Organization of the Petroleum Exporting Countries (OPEP), Venezuela was producing 1,197 barrels per day in September, down 957,000 barrels per day in 2016.

Recent trend:

WTI reached US $ 76.41 per barrel (October, 03), its maximum level from November 2014. After that, the price of crude oil experienced a downward correction of approximately 7%, as we anticipated last week. We wrote:

“However, the wide gap between the price and its 200-day average at 01 October, US $ 68.99 vs. USD $ 75.47 could anticipate an important correction in the short term.”

After the significant downward correction that the WTI crude price experienced, the Bollinger Bands show support and resistance levels around US $ 70.25 / 73.80 respectively in the short term. The decrease described above partially closed the gap that existed between the spot price with its 200-day moving average (US $ 67.15). On the other hand, the MACD and RSI index do not anticipate any change in the trend of the price, so the WTI could resume its upward trend in the short term.

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