Both Supply and Demand Point to Higher Crude

For a while now, crude prices have been driven largely by demand, both existing and forecast. Supply has been quite tight, but that has been offset by expectations for an economic slowdown, particularly in the US. Over the last few weeks, though, the view in that regard has begun to change. So much so, in fact, that OPEC issued a bullish demand forecast this week. Of course, the cynic would say that that is no surprise, given that the cartel exists primarily to support oil prices.

Back when I worked in dealing rooms, talking your book was a common thing. Back then, news was still passed by word of mouth to a certain extent, and rumors would often appear, seemingly out of nowhere, that supported one side or the other of a market. In reality, though, a lot of those rumors were started by traders who had big positions, and the “information” that did the rounds was designed to benefit them.

After OPEC released their oil demand forecast this week, it is tempting to see their optimistic view of the near future in that regard as just that. They are, after all, inherently long oil. So, their saying that demand is expected to remain strong and even upping their growth forecast is not exactly shocking. However, there is other evidence that backs up their view.

For example, here in the US, Delta Airlines (DAL) released disappointing earnings this week, saying that their problem was not weak demand from passengers, but rather a huge number of available flights that was suppressing ticket prices. All of those flights burn fuel and cheaper tickets should stimulate demand enough to support them, keeping oil demand from that source strong. In addition, official figures show that vehicle traffic in America is increasing, with most forecasts anticipating a strong summer travel season.

The add in the fact that this week’s inflation figures show a drop, increasing the chances of a rate cut sooner rather than later, and US demand looks like strengthening quite significantly.

Of course, as important as it is in terms of oil consumption, America isn’t the be all and end all. However, there are also encouraging big picture signs elsewhere. With elections out of the way in the UK and France, those economies will likely pick up for a while, while in emerging markets, Indian growth of 7.8% in the first quarter indicates continued demand growth there. China is a possible weak spot after announcing a surprise decline in imports earlier this week, but the expectation is for government stimulus there in response quite quickly which, in a semi-centralized economy, can have quite a rapid impact.

So, from the demand side, things look good for crude, but what about supply? Is that still tight, and will it continue to be so?

Well, according to the EIA, the answer to that question is “yes”. They have a lower demand growth forecast than OPEC, buts still expect a supply deficit next year. Based on history, OPEC+ are more likely to exacerbate that situation than ease it, and nor is supply likely to be boosted from elsewhere. The new UK government are looking to restrict production from the North Sea and investment in the industry in North America will be restricted by the upcoming US election, so if OPEC+ do maintain current output levels, or even decrease them further, it is hard to see supply increasing in any meaningful way.

So, for now, oil looks set to continue to catch a bid. The next question, of course, is how high can it go, and for that, we turn to the chart.

The first target is the April high just above $87, and given current sentiment that looks very achievable, maybe as early as next week. If that is breached, then there is a pretty clear path to around $90. However, there will be significant resistance above that level, and at some point, higher prices will start to impact demand, so the price will likely stall there. Still, for now, crude can continue to move higher, and I for one will be trading for a while with a long bias.