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The Long and The Short of Crude Oil

Autore: FX Empire Analyst - Barry Norman




The Long and The Short of Crude Oil

The Long and The Short of Crude Oil

In forecasting a credible scenario of the future development of the price of oil, we believe that it is necessary, above all, to anticipate that the global economy will need to tackle the further deterioration of the situation in the eurozone. After the actual stagnation in the first half of the year, a downturn is likely to occur in the second half. A prospective deterioration of the situation in Spain or Italy (or Greece, where, notwithstanding the positive outcome of its election, more problems are likely to occur) would likely make the price of oil continue to fall, with this to be followed by huge liquidity measures taken by leading central banks, which might help the price of oil to return to somewhere around its current levels. Of course, even this roughly outlined scenario involves numerous questions (such as whether it is actually manageable, i.e., politically feasible in terms of the ECB policy, to stop the rise in Spanish yields, etc.); however, in view of the current situation, the above-mentioned possibility appears to be more likely than the ‘oil shock’ scenario.

Today, crude oil has dropped, no plunged below the 80.00 price level to sell for 78.72, when just a few months ago, traders were saying that we would not see oil below the 100.00 level this year.

During early Asian session, oil futures prices are trading above $78.70/bbl in electronic platform. Oil prices have rebounded from its nine month’s low on threat from tropical storm formation in Gulf coast region. As per National Hurricane center, there is 70 percent chance of tropical storm formation very close to Gulf region, which may lead for supply and production disturbances. Though fundamental factor of supply disturbance is supportive for oil futures, prevailing economic concern may continue to weigh on oil prices. Most of the Asian equities are trading down in lieu of slow down of manufacturing sector of major nations like US, Europe and China. Other than this, Moody has downgraded a handful of major financial institutions in US and Europe. Spain needs as much as 62 billion euros in capital to withstand in this worst economic situation. Thus, prevailing economic concern may continue to limit the gains in oil prices. From economic front, IFO numbers from German are expected to paint a negative picture of the economy, which may weigh on Euro. So, ultimately the impact can be seen on crude oil prices for a down ward trend in the European session.

In the last few weeks, risky assets have seen significant sales, which have also had a particularly strong impact on commodity prices, and notably oil prices. With the redeterioration of the situation in the eurozone and poorer data from the U.S., the price of the Brent contract (ICE) with the nearest maturity fell by almost 20% in May. Thus oil is trading below US$100 per barrel, i.e., the lowest level since October 2010. The price has fallen hand in hand with the significant elimination of speculative long positions for both Brent and U.S. light oil WTI. In other words, what is known as the financial part of the market (such as hedge funds) reduced its bets on a further increase in oil prices. The investment bank Goldman Sachs (GS) has sprung a surprise and sparked a lively discussion in recent days, with its report predicting that the Brent price will be around US$128 per barrel in six months.  


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