Trading Coach - Market Insights - Getting Bulled up on Crude

Crude Oil prices have largely traded sideways in a wide range for the better part of 2019 after falling 38% at the end of 2018 amid the deflationary vortex of broader markets. Crude Oil prices firmed up at the start of 2019, reclaiming approximately 26% of its Q4 18 plunge between January and May. However, the rally did not hold and the market once again coughed up roughly $15 of the price, or 23%. However, going forward weve several reasons to believe Crude Oil prices are likely to resolve themselves higher by year end, than risk falling below the psychological support level of $50 bbl despite the bearish supply and demand forces.What to watch for into year end and early 2020 - Supply and Demand, New IMO Laws, Geopolitical Unrest, and weaker US Dollar.

  1. Supply vs Demand

A slower outlook for the global economy has undoubtedly weighed on classic fundamental supply and demand figures. Oil growth was just over 0.5% on a y/y basis at the beginning of 2019 which was the lowest level of growth since 2011. However, consensus is beginning to come around on an increase in consumption in 2020, forecasting 1.1M bpd which is up roughly 300K bpd from 2019 consumption.

Also it should be noted that Chinese oil demand shockingly surged higher this year at a rate of 10% y/y despite its poor economic performance. This may have more to do with them refining crude into by-products than actual demand from the region, but still another bullish tidbit for the market. Note that we do expect a continuation of slower than normal economic activity from the far east well into 2020.

2.International Maritime Organization

A new law set by the IMO will go into place come Jan 1st that limits the amount of sulfur content in shipping fuel (from 3.5% down to 0.5%). Marine vessels being one of the main sources of how goods are shipped internationally will now be using now be using diesel as their main source of fuel. Naturally, and should go without being said, will increase demand for crude oil refinement. Its been forecasted that diesel fuel could reach an avg price of $4.00 gallon nationally by early March, up from a national avg of $3.05 gallon as of mid-October. Furthermore, doubling down on demand of the distillates complex will be the start of the US heating season, and if it turns out to be a cold winter in the northeast, prices could continue to feel significant upward pressure. To capitalize on this new law directly, consider using the NY Harbor ULSD futures contract better known as Heating Oil.

3. Geopolitical Unrest

Since President Trump decided to tear-up the Iran Nuclear Agreement this past May and renewing economic sanctions, weve seen several attempts by Iran to disrupt the flow of Oil and create havoc in the Middle East. From the tanker attacks and detainments over the summer, to the recent attacks on the Saudi Aramco facility, the worlds largest oil production facility - Iran has shown that it will likely stop at nothing to continue to be a thorn in the USAs side over there. With the Iranian economy on the brink of collapse due to sanctions, theyre in a nothing to lose position, we think its a high probability that theyll continue to be the squeaky wheel in months too come attempting to force the President into a position of a military response or to the table for discussion. As the President heads into an election year, wed think that hed be more inclined to further discussions, rather than a military response - But you never know.

In conclusion, with persistent economic difficulties headed into the back end of the year, classic supply over demand continues to be reflected in the price action in the market, but the fundamental arguments are beginning to stack up on the bulls side and a turn higher in crude prices may not be far off.An added bonus to the "bulls" will be if we're finally beginning to see signs of a top in the US Dollar. Trade well out there and be careful!!

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