Oil is the most important asset for us, and today I would like to consider its prospects for June and July 2020, especially since last week new data were released from the US Energy Information Agency (US EIA), which allows us to look at the oil market not only from a technical but also from a fundamental point of view.
In the two months since the collapse of oil, quotes of black gold around the world have grown rapidly and are now at about $ 38 per barrel for the North American grade WTI #CL. Brent crude oil is trading near the 41 dollar mark, Urals crude oil has surpassed the 40 dollar mark.
In many respects, the growth in quotes was due to reductions in the production of the OPEC cartel and the countries that joined it, as well as a decrease in US oil production by 1.5 million barrels to 11.4 million barrels per day. Moreover, the United States did not sign the OPEC + agreement, and production reduction occurred there naturally, primarily due to a decrease in the share of shale producers. According to Baker Hughes's service company, the number of active rigs in North America has declined to its lowest levels since 1987. At the same time, the commercial stocks of the countries of the Organization for Economic Cooperation and Development - OECD, which are the main global oil consumers, still remain at high values, significantly exceeding the weighted average five-year range of 58-66 million barrels (Fig. 1).
Figure 1: Commercial Oil and Distillate Reserves in the Organization for Economic Co-operation and Development - OECD
In its June short-term forecast, the US EIA predicts that in the second quarter of 2020, global demand for petroleum products and liquid fuels will average to 83.8 million barrels per day. This is 16.6 million less than at the same time last year. The Agency expects that in the third quarter, liquid fuel consumption will increase to an average of 94.9 million and predicts that worldwide in 2020, oil and liquid fuel consumption will average to 92.5 million barrels per day, and then increase by 7.2 million barrels in 2021.
As the global economy recovers in the second half of this year, stocks will gradually decrease, which will support oil prices, but stocks will reach average levels no earlier than next summer. In general, the short-term forecast from the US Energy Information Agency suggests that the price of WTI crude oil in 2020 will be $ 35.34 / b (Fig. 2). In turn, the Brent brand will be traded at $ 37 / b, and in 2021 its price will rise to an average of $ 48 / b. Moreover, as follows from chart 2, NYMEX traders expect a more gentle recovery of WTI #CL oil prices this and next year, assuming a weighted average price of about $ 40 with significant deviations in both directions.
Figure 2: Oil Earnings Forecast from US EIA and NYMEX Traders
By the way, it is NYMEX traders who need to be thanked in many respects for such a sharp increase in oil prices, which we saw in April and May of this year. A group of speculative traders called Money Manager began to build up a long position when the price of WTI #CL oil reached $ 25. It was then that private investors from the United States began to actively buy oil through the ETF US OIL stock exchange fund, and these investors in April suffered the most from the decline in oil prices in the negative zone.
Despite the fact that some speculators lost money when the price fell, purchases by the manager's money were continued, which ultimately led to the recovery of WTI oil prices up to the value of $ 40, and at the moment, long positions of speculators are at maximum levels since the summer of 2018 of the year. This fact against the background of the lack of an influx of new money to the market, as evidenced by the indicators of Open Interest, speaks of optimistic sentiments prevailing in the circles of speculators, which may turn into bitter disappointment.
Speculators are following the trend, and WTI #CL oil has already once broken the "double top" reversal pattern, which can be seen in the four-hour time zone. Therefore, theoretically, one can count on the continuation of the #CL trend to the level of $ 45. However, in my opinion, such growth will be the final phase, after which the market is likely to see a reversal of #CL with a subsequent decline to the level of $ 25.
In this regard, within one to four weeks for #CL, we can assume the formation of a range in the range of 38-45 dollars per barrel, after which, presumably, a correctional decline will begin on the market, which is associated with a number of unfavorable factors, which will be discussed below.
As you probably know, oil futures are trading one month ahead of the lag, and the August contract, which expires in mid-July, is most actively trading. Then the September contract comes, but in late August and early September, numerous tropical storms collapse on the Gulf of Mexico, which often leads to a halt in oil refining and filling up storage facilities. This, in turn, leads to lower oil prices. However, the storage facilities are already full. In addition, the car season ends in August, which this year was not particularly active due to the numerous lockdowns associated with the Covid-19 pandemic.
According to OPEC + sources, a meeting of the technical committee held on June 17 did not give any recommendations for further reductions. The parties to the transaction decided to focus on the implementation of agreements already reached to reduce production by 9.7 million barrels. Moreover, in May, members of the cartel and the countries that joined them fulfilled the agreement by 87%, which shows a rather high responsibility, given the low level of self-discipline.
Summing up, I can assume that at the end of June and the first half of July WTI #CL oil can still add value and grow to the level of $ 45. However, with a high degree of probability, the impulse of movement has already exhausted itself and is in the final phase. In this regard, in the second half of July, we can expect a new wave of decline in oil prices. From this point of view, investments in the oil and refining sectors are somewhat premature, so before buying oil and other assets of the industry, think about why they did not grow after the quotes of black gold and whether they will become even cheaper. Be careful and follow the rules of money management.