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John J Hardy
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Article / 02 January 2018 at 11:55 GMT

Downside risk to oil as 2018 begins – #SaxoStrats

Head of Commodity Strategy / Saxo Bank
Denmark
  • Crude oil starts 2018 on a firm footing but risks lie ahead
  • Bullish momentum has helped cause a record speculative long
  • Price gain has also supported a strong rebound in US shale output
Teheran
 Tehran and other Iranian cities have been hit by a deadly wave of anti-government protests.
Photo: Shutterstock

By Ole Hansen

WTI and Brent crude oil have both started 2018 on a firm footing. The Q4 rally was primarily driven by multiple but temporary supply disruptions while the latest leg up has been driven by protests across Iran. The bullish momentum seen since June has, however, also helped create a record speculative long bet while supporting a strong recovery in US production. 

During the quiet and shortened trading week up until December 26 hedge funds continued to buy into the price strength that was being provided by pipeline disruptions in Scotland and Libya together with falling US inventories. A total of 27,000 lots of WTI and Brent crude oil contracts were bought taking the total net-long to a fresh record of 977,000 lots. The long to short ratio reached 7.8, not far below the February record of 8.3.

Speculative positioning in Crude oil
 
The year-to-October rise in US production reached 866,000 barrels/day according to recent data found in the monthly report from the Energy Information Administration. The jump in October helped remove the gap to weekly estimates that had prevailed all year. At current crude oil prices it is only a matter of time before the 10 million barrel/day production target will be reached. 

US oil production
 
Apart from multiple supply disruptions since October, crude oil has also found support in falling US inventories, down by more than 100 million barrels from the March 2017 record peak. A slump of this magnitude has helped support the price despite most of it being due to rising exports and lower imports. Crude oil stocks, however, tend to begin their seasonal recovery between January and March due to the seasonal slowdown in refinery activity. 

US Oil Data
 
With Opec and Russia having promised to keep production capped, the two key questions which are likely to determine the price of oil in 2018 are the production response to higher prices from US shale oil producers and, not least, global economic performance. Another year of robust global demand growth in the region of 1.4 million barrels/day (the average of estimates from Opec, the IEA and the EIA) is expected to be met with a rise in non-Opec supply of 1.4 million b/d. 

2018 demand and supply forecasts

 
What could go wrong? Barring any geopolitical upsets, the record long held by funds in WTI and Brent crude oil towards the end of 2017 could pose a challenging start to 2018 with the price of oil potentially beginning the year looking for support. We also have some concerns about the Chinese economy in 2018 that ultimately could lead to lower than expected demand growth. US motorists being faced with rising fuel costs could also trigger a slowdown in demand. 

Given the impact on the price of oil of a few hundred thousand barrels per day in changed supply or demand we see the risk – especially during the first half of 2018 – skewed to lower prices with Brent crude oil more likely to trade in a $50 to $60 range than $60 to $70. By year-end we see Brent crude at $60/b with WTI three dollars lower at $57/b

Renewed geopolitical risks (of which we have had plenty during the second half of 2017) are likely to be the key source of support and one which could upset our call for stable-to-lower prices during 2018.

WTI crude oil has returned to the key psychological area around $60/b where it found resistance back in Q2 2015: 

WTI crude oil, first month cont.
Source: Saxo Bank 
 
 
 – Edited by Clare MacCarthy

 

Ole Hansen is head of commodity strategy at Saxo Bank





02 January
Oezy Oezy
Hi Ole, Do you see also NG production disruption because of freezing? And how effect it may do and importance of that? Thanks

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