PETROANALYSIS || ARTICLE

2018: Prices, market fundamentals and financial markets

Published on

December 16, 2018

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Article by

Hermes Pérez

The next note will evaluate the evolution of the main data of the oil market in 2018: prices, market fundamentals (supply and demand) and financial market operations.

In this context, the prices of the oil market rose around 32% (equivalent to US $ 17 per barrel) so far in 2018 (until December 13) and accumulate an increase of 63% on average since 2016.

The aforementioned upward trend occurred despite the significant downward correction experienced by the main crude oil markers between November and December of 2018. In this regard, the West Texas Intermediate (WTI) crude oil fell 36% between the end of October and the middle of December 2018.

Among the reasons that could explain the rise in prices we can find, among others, the following variables:

1. Strengthening the demand and crude deficit.

In 2017 and in the first months of 2018, it was observed that the demand for crude oil exceeded supply. This situation led to a deficit in the markets, which was over one million barrels a day on average in 2017. Although this deficit decreased at the beginning of 2018, it stood at around 900 thousand barrels per day in the first quarter of 2018 and in 333 thousand barrels per day on average in the first semester of the current year. This higher demand in 2018 came from increased purchases from China (3.4%), the United States (2.4%), and some non-OECD countries (1.9%), among others.

For its part, the aforementioned boom in demand occurred in a context of:

a. Strong growth in world activity, which stood at 3.7% in 2017 and 2018, according to the World Economic Outlook (WEO) of October prepared by the International Monetary Fund (IMF).

b. Weakness of the US dollar, which cheapened crude purchases. In this context, the dollar depreciated 9.9% in 2017 and 12% at the beginning of 2018. Despite the upturn in this currency at the end of 2018, its value is still below that recorded at the end of 2016 and in the first months of 2017.

2. Increase in long positions in financial markets.

Another element that we cannot rule out when evaluating the rise in prices in 2018 is the increase in purchases of long positions in the financial markets.

Both in 2017 and at the beginning of 2018, there was an increase in purchases of long positions contracts, associated with rising price bets. Although this phenomenon was observed with greater intensity in 2017 (24.7%), until May 2018, the purchases of long positions were located 24% above the average value in 2017. In this regard, the volume of purchases of long positions in the oil financial markets reached historical maximum levels in the series in January and then in April 2018.

This trend was reversed in the last months of the year when there was a fall in the demand for long positions and a rebound of short positions (20%), the last month of the year.

Meanwhile, the pronounced decrease in prices during the last two months of the year (33% on average) may be due to, among others, the increase in the supply of crude oil, particularly from the United States and the lower production from the Organization of Petroleum Exporting Countries (OPEC).

In this sense, the aforementioned increase in pumping has led to a surplus in the market in 2018, which has manifested itself with greater intensity in the second half of the current year.

This can be explained by the greater extractive effort of non-OPEC countries (3.9%) in 2018, led by the shale phenomenon in the United States (13.2%) and to a lesser extent in Russia (1.5%).

The above described, contrasted with the drop in the pumping of the OPEC (-0.2%) in response to the brutal collapse of Venezuela and despite the higher sales of Saudi Arabia (3.1%). Thus, the South American country has stopped producing about 800 thousand barrels in 2018, according to secondary sources of OPEC, which is equivalent to a fall of 41% so far this year until November.

In summary, the rise in oil prices in most of the year was due, among other reasons, to the upturn in demand for crude oil as a result of the greater world activity and in response to an increase in the volume of long purchases in the financial markets. This situation has been supported by the drop in oil supply by OPEC due to the productive collapse of Venezuela and despite the efforts to counteract this situation by Saudi Arabia. The downward correction in prices observed in the last months of the year was, to a large extent, the result of the excess of supply driven by the production phenomenon of the United States in a context of greater purchases in short markets in the financial markets.

 

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