What do I need to know to trade oil?
Traders are now expecting to see mild gains for crude oil through the summer, and remain stable through the rest of the year. So what do you need to know when it comes to trading oil?
Brent Crude Oil expected to stabilise in short term
The price of WTI Crude Oil is currently trading around $60 per barrel and Brent Crude Oil at around $63 per barrel. These prices, while still substantially lower than the price of crude oil a year ago, are stabilising to a degree and analysts are expecting short-term gains over the course of the summer. The one-year forecast for WTI Crude Oil is $68 per barrel (the US benchmark).
Over the past couple of weeks, key players in the oil market are of the opinion that the price of crude oil has stabilised and that summer gains are on the cards. That bullish sentiment is expected to continue well into the remainder of year, making the latter half of 2015 more stable for commodities traders than the earlier part of the year.
At the beginning of 2015, US oil production was running at full capacity. Shale oil wells were producing excess capacity, drilling and pumping oil to expand US market share in an oversupplied oil market. It was precisely the oversupply of US oil producers and OPEC’s decision not to halt production that led to prices plummeting in the face of slowing global demand. Crude oil prices dropped precipitously – almost 40% for the year. However, the price of crude oil has been on the up and up of late.
Reduced US output putting upward pressure on oil
According to the US Energy Information Administration (EIA) the price of North Sea Brent Crude increased on average by $5 per barrel during May 2015. The average trading price was $64 per barrel. Factors influencing oil prices include increased global demand, unplanned outages in supply in North Africa and the Middle East, and a reduction in US production in the months ahead. Combined, these facts are placing strong upward pressure on the price of crude oil.
Adding to the upward pressure on the oil price is the shuttering of multiple US oil rigs. By the end of May 2015, Baker Hughes reported that US crude oil rigs in operation had fallen for the 25th consecutive week. This has resulted in a 60% decline in crude oil prices (as at October 2014) – this in spite of increases in inventories of crude oil for the third month running. The EIA estimates that the price of Brent Crude will average $61 per barrel through the remainder of 2015. By 2016, the projection is at $67 per barrel.
Summer surge expected to result in short-term spike
While some commodities brokers are hedging their bets at a price between $65 and $70 in the short term, the sustainability of those prices over the long term is less certain. The reason that short-term projections are bullish is attributed to the surging demand over the summer months. As US vacationers take to the roads for summer holidays, gas consumption is expected to increase. But gains will quickly be curtailed as prices rise, since new entrants will make their way into the oil market.
The price of crude oil will continue to gain momentum from June through September as rising temperatures, increased demand and travel plans come into play. Present estimates suggest that a price in the region of $70 per barrel is not entirely out of the question. Bullish sentiment definitely pervades the market at present and the mid-to-upper $60 range is on the cards. The question that traders are asking is whether now is the time to buy into oil. Based on the analysis, it is all but certain that oil will rise in the coming months.
During May and June 2015, the price of Brent Crude ranged between $55 and $66 per barrel. Also important for traders is the crude oil futures curve which has flattened out considerably in recent weeks. This means that the volatility has been reduced and stability has returned to the pricing of oil. As a case in point, futures delivery for December 2015 are only at a 2.5% premium over July prices.
Gasoline price projections
However, this sentiment is not shared by all analysts. Goldman Sachs are anticipating WTI Crude Oil hitting lows of $45 prior to staging a recovery. The demand for oil spikes in July and August and high profit margins are being enjoyed by refineries. Bearish analysts are of the opinion that demand will be reduced by mid to late July and a price drop below $50 may be on the cards.
During 2014, the regular price of gasoline averaged $3.36 per gallon. Over the course of 2015 the price is expected to average $2.44 per gallon. The expectation that the retail price of gasoline will rise above $3 per gallon by September stands at 10% probability.
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The content of this article is the personal opinion of the author and not Intertrader.com. The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.