When asked about the future direction of oil prices, as I am frequently, I take the safe approach of “no one really knows.” That is not true. What is true is that the only person that genuinely knows the price of crude oil is the guy that just bought 120,000 tons sitting in a tanker outside of Singapore, Rotterdam, or Galveston harbors.
The price that is quoted in newspapers and from the “experts” is the price of the Futures Contract for either West Texas Intermediate or Brent Oil quoted and traded on the New York Mercantile Exchange and Intercontinental Exchange, respectively.
You can find aggregate quotes for spot (Cash) prices but these are gained by talking to buyers in Singapore, Rotterdam and Galveston. The reality is that the buying and selling of crude oil comes down to one seller and one buyer negotiating the price.
Large users of almost any commodity from wheat to make bread and corn for feed are more concerned about fixing a price than the actual price itself. But during times when prices are trending either up or down like now, then the actual price becomes more important and buying and selling is done shorter term.
Understand that the speculators in the futures markets are more concerned about the newspaper headlines about nonsense geopolitics (that change from day to day) and short-term supply-demand conditions that change at most from week to week.
If you are an oil trader, what you secretly wish for is that a “supertanker” will explode rounding the Cape of Good Hope and that ISIS will take credit for it while promising more attacks are coming.
Back in the good old days there was basically one crude oil seller (Opec or Organization of the Petroleum Exporting Countries) and one buyer—the US. Currently the US is importing the same nominal amount of crude as in 1967 when the US economy was worth $861 billion instead of $19 trillion. The US was importing 40 percent of its requirements and that is down to 19 percent and much of it from Canada.
The two largest oil-exporting countries are Saudi Arabia and Russia. China is Russia’s biggest customer for oil at 15 percent of its needs (up 23 percent from a year ago) with Saudi Arabia at 13 percent (down 15 percent from last year).
With oil prices up 25 percent this year, you might think that demand is soaring or supply is dwindling. Not true. If you look at global oil demand against supply for the past 20 years of wars, disasters, and “experts” saying oil supply has peaked, it is almost a Divine miracle that both sides of the equation have stayed in near-perfect balance. It is like the SM department store merchandise manager who knows exactly how many small, medium and large t-shirts to keep in stock has been running things.
Or maybe much of the oil business is built on lies. The current forecast is that oil demand growth will decrease both in 2019 and 2020. Want to bet that supply growth will also fall along with demand?
The forecast is that oil prices will go higher because of new economic sanctions that the US will put on Iran next month. My gut feeling is that Iran will offer last minute concessions to avoid the worst of sanctions, just like North Korea did.
My fearless forecast for what it is worth is that the top in Brent crude will be $95 at most. But break that and it is “game over” all the way to $110/$120. Since I did not win P1 billion in the Lotto, I am betting Brent will stay between $75 and $85 and go down after the first of the year.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.