Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Silver Short-Term Trend Analysis - 26th June 19
Iran and the Dying Days Of the US Empire - 26th June 19
Why a Saturated Online Gaming Market Spells Good News for Gamblers - 26th June 19
Natural Gas Sets Up Bottom Pattern - 26th June 19
Has Gold Price Broken Out Or Not? Technicals And Fundamentals - 26th June 19
Stocks and XAU Gold Miners Next Bull and Bear Markets are Now Set Up - 26th June 19
Gold Price Trend Forcast to End September 2019 - Video - 25th June 19
Today’s Pets.com and NINJA Loan Economy - 25th June 19
Testing the Fed’s Narrative with the Fed’s Data: QT Edition - 25th June 19
What "Pro Traders" use to Find Profitable Trades - eBook - 25th June 19
GDX Gold Stocks ETF - 25th June 19
What Does Facebook’s LIBRA New Crytocurrency Really Offer? - 25th June 19
Why Bond Investors MUST Be Paying Attention to Puerto Rico - 25th June 19
The Next Great Depression in the Making - 25th June 19
The Bad News About Record-Low Unemployment - 24th June 19
Stock Market New High, but…! - 24th June 19
Formula for when the Great Stock Market Rally Ends - 24th June 19
How To Time Market Tops and Bottoms - 24th June 19
5 basic tips to help mitigate the vulnerability inherent in email communications - 24th June 19
Will Google AI Kill Us? Man vs Machine Intelligence - 24th June 19
Why are Central Banks Buying Gold and Dumping Dollars? - 23rd June 19
Financial Sector Paints A Clear Picture For Stock Market Trading Profits - 23rd June 19
What You Should Look While Choosing Online Casino - 23rd June 19
INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - 22nd June 19
Here’s Why You Should Drive a Piece of Crap Car - 22nd June 19
How Do Stock Prices React to Fed Interest Rate Cuts? - 22nd June 19
Gold Bull Market Breaking Out! - 21st June 19
Post-FOMC Commentary: Delusions of Grandeur - 21st June 19
Gold Scores Gains as Draghi and Powel Grow Concerned - 21st June 19
Potential Upside Targets for Gold Stocks - 21st June 19
Gold Price Trend Forcast to End September 2019 - 21st June 19
The Gold (and Silver) Volcano Is Ready to Erupt - 21st June 19
Fed Leaves Rates Unchanged – Gold & Stocks Rally/Dollar Falls - 21st June 19
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Crude Oil at a Crossroad of Inventory and Fed’s QE2

Commodities / Crude Oil Oct 18, 2010 - 04:11 AM GMT

By: Dian_L_Chu

Commodities

Best Financial Markets Analysis ArticleOil prices have continued to soften at $82.51 a barrel for November delivery on the NYMEX Friday after a Federal Reserve Chairman Ben Bernanke’s speech sparked some uncertainty as to how far the central bank will support the economy.


Crude was also weighed down by the weekly inventory report from the U.S. EIA. Despite a week-on-week draw of product and crude inventory, and supply interruptions from Canada due to Enbridge Inc. 670,000 b/d crude pipeline shut-in since Sep. 9, and at the Houston Ship Channel after a barge knocked down a power line, the overall stocks are still well above the 5-year average with a year-over-year increase (Fig. 1)


Decoupled from Equities and Metals

Crude oil prices had generally correlated with the base metals and equities on U.S. dollar weakness and strong Asian demand. However, due to the abundance of inventory and supply, crude has remained range-bound despite improved market sentiment, and started to decouple and underperformed other commodities with tighter supply conditions, such as copper, as well as equities. (Fig. 2)


According to Barclays, over the past month, the average price increase of base metals has been 11%, compared to only 3% for WTI crude. While this has surprised some traders, it is nevertheless a reflection of diverging market fundamentals, particularly in terms of supply.

Transparency Kills the Mystery

Crude oil prices are also at a “disadvantage” due to the lack of a cross-sector transparency. As one of the most widely traded and liquid commodity, oil has relatively better transparency in the form of weekly inventory / demand detail reporting and various widely available forecasts and analyses, while other commodities remain more “shrouded in mystery.”

So, from that perspective, crude is subject to more volatility cue to the weekly inventory report, and agencies’ demand/supply forecasts. (Just imagine if there’s a weekly inventory report with similar detail, say for gold, silver and copper).

WTI and Brent Disconnect

The persistent inventory overhang at Cushing, OK, the delivery point of NYMEX crude contracts, has also rendered WTI at a discount to the North Sea Brent (Fig 3), whereas WTI is a sweeter and higher grade crude than Brent, and should trade at a premium. This, in turn, has made WTI somewhat disconnected with the global picture, and diminished the status of WTI as a global oil price benchmark.


OPEC has voiced its concern about WTI, which culminated in Saudi Aramco’s decision last November to ditch WTI for the Argus Sour Crude Index to its oil for sale in the US market.  (Saudi Aramco had priced its U.S. deliveries against WTI since 1994.) 

And Reuters reported there’s new push from Asia-Pacific--user of a third of global crude-- in favor of European Brent to price Southeast Asian crudes. A Reuters survey of traders showed that by 2012, Brent is expected to replace other Asia-Pacific regional benchmarks.

This move will further extend Brent's influence--currently tops WTI and referenced in about 70 percent or global crude supplies--and most likely divert the trading volume from NYMEX into ICE, weakening the U.S. status as the world’s leading financial trading hub.

Meanwhile, widespread strikes, sparked by the pension reform, at all of France's 12 refineries have caused supply concerns among oil producers including Total, and if prolonged, could further widen the WTI-Brent spread. (However, it most likely will not have much impact on the U.S. since France is not one of the major importers of crude product into the U.S.)

"We'd Love to See $100 a Barrel"

While high stocks level traps crude, the 13 percent decline in the Dollar Index since June, on the other hand, has prompted some OPEC members to support $100 oil. For example, Bloomberg reported that Libya indicated “We would love to see $100 a barrel” to help offset the loss of revenue from the weaker dollar. And Venezuela claims the U.S. currency’s weakness means the “real price” of oil is about $20 less than current levels.

QE2 Brings New Normal To Crude

Federal Reserve Chairman Ben Bernanke said in a speech on Oct. 15 that the Fed is prepared to buy Treasury bonds to stimulate the faltering U.S. economy, i.e. a second round of quantitative easing (QE2), and that the interest rate will remain low and longer than the markets' expectation (meaning probably through 2012, instead of 2011).

Such policy typically will further weaken the U.S. dollar, while artificially pushing up prices of dollar-denominated commodities such as crude oil, which could lift crude oil into a New Normal of crude oil trading range of $80 to $95 a barrel from the current $70 to $85 price band, through the end of the year, along with lots more jabs from OPEC, particularly Hugo Chavez.

“Trader’s Market” Through Year End

For the remainder of the year, a “miracle story” in either the demand or supply side of the equation is highly unlikely.  Barring geopolitics and/or an exceptionally freezing winter season, crude oil probably will be a “trader’s market” before 2011, and prices will be mostly dictated by its inverse relationship to the U.S. dollar, and the timing and extent of the widely expected QE2 from the U.S. central bank.   

Asia Holds the Demand Card

For now, Asia and the Middle East are expected to account for the majority of the world's oil demand growth over the next few years, while in the long term, demand is still looking to outstrip supply. (Fig. 4)


Furthermore, China might just put some extra excitement into the crude market next year as Bloomberg reported that China’s new strategic petroleum reserve storage tanks are expected to come online next year.  This means Beijing could be ready to stockpile on strategic petroleum reserves to safeguard the country’s rapidly rising hunger for energy.

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules