Is Crude's move lower corrective and if yes when can we expect the uptrend to resume?
|The Macro Perspective
Crude has seen two major bear markets in the past decade. The first one occurred after the 2008 Global Financial Crisis (when most asset classes saw a big decline) and the second one was in H2 2014. In both cases crude fell over 70% within a period of 6 months, which made these moves very sharp and sudden.
Following the 2014 crash, shale producers (the main driver behind vastly increased production over the past decade) suddenly became unprofitable and were forced to cut production. This gave the traditional OPEC countries a breather as they managed to grab the reins of global oil production once again. OPEC and non-OPEC producers agreed in 2017 to control production and this seems to have been the catalyst for oil’s bull market rally, which brought us to $70+ prices in mid-2018.
We are now faced with a finely balanced market between the control of supply among traditional oil-producing countries and the re-emergence of shale producers. OPEC countries are perfectly happy to see oil consistently above $60 per barrel, and they are more than happy to relax supply constraints. However, this downward price pressure is broadly balanced by growing geopolitical instability and uncertainty.
The US Dollar has always been a major driver for oil price, as it’s always been a dollar-denominated asset. Any major USD moves will certainly have an impact on oil price, and this has been evident in late 2017 and 2018, as the greenback has fluctuated significantly.
So what’s in store for oil prices in the medium term? The macro picture is probably on the bullish side as the US Dollar will probably see another leg down on the back of the US administration trade decisions. Also, the US government keeps producing vast annual deficits, which cannot help but weaken the Dollar’s purchasing power. We have seen USD strength in Q2 2018 following nearly a year of weakness – this is something that we have anticipated and warned about in our past blog posts. WTI is now trading at around $65 and could well test the major support zone near $60. However, this should be a short-term correction before the next move higher which should take out previous highs and culminate somewhere around the $75-$80 range, or possibly beyond.
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