Never miss a story from Tyler Yell

Subscribe to recieve updates on publications
Please enter valid First Name
Please fill out this field.
Please enter valid Last Name
Please fill out this field.
Please enter valid email
Please fill out this field.
Please select a country

I’d like to receive information from DailyFX and IG about trading opportunities and their products and services via email.

Please fill out this field.

Your Forecast Is Headed to Your Inbox

But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk.

Your demo is preloaded with £10,000 virtual funds, which you can use to trade over 10,000 live global markets.

We'll email you login details shortly.

Learn More about Your Demo

You are subscribed to Tyler Yell

You can manage your subscriptions by following the link in the footer of each email you will receive

An error occurred submitting your form.
Please try again later.

Crude Oil Price Forecast Talking Points:

  • The ONE Thing: While OPEC+ is hoping the second dose of production curbs will heal the wounds of the current bear market, a drop in demand is the real concern.
  • After trading at four-year highs in early October, WTI crude has fallen over 20% on a dual concern of a new supply glut and falling demand as claimed in the OPEC monthly report.
  • The recent drop is bringing back memories of the 2008 and 2014 decline of which the former was a demand shock followed by position liquidation with the latter due to gross oversupply relative to global demand.
  • Prefer to listen to your market analysis? Check out the new DailyFX Podcast discussing Crude Oil

That escalated quickly. While energy markets were moving higher under potential supply shocks, a domino of events in global macro markets shifted the conversation to too much supply relative to possibly shrinking demand.

Commodities are one of the pure supply and demand markets left, and when the shifts in the balances of demand or supply arise, sharp price moves often result.

This fundamental walkthrough of Crude’s breakdown will walk through four lenses of viewing the breakdown that may show a v-bottom may be difficult to actualize despite RSI(14) being the most oversold since 2014.

We'll take a fundamental look at crude's bear market through four lenses:

  1. Emerging Markets via the EEM ETF shows falling oil demand
  2. Institutional Positioning has been exiting crude for most of 2018
  3. Futures Spreads Shift from Backwardation to Contango showing falling support via front-month premium
  4. US Crude Stockpiles showing rising supply on falling demand

We'll take a fundamental look at crude's bear market through four lenses:

Please add a description for the image.

Data Source: Bloomberg

The chart above shows the toping process that happened early in the year on EEM. EEM has fallen ~24% on the back of trade wars concerns and limited demand from China and other formerly strong emerging markets. Much of this drop has accelerated as the US Dollar has strengthened on the back of the Federal Reserve’s persistent hike of interest rates with views building that 3-4 hikes could be coming in the next year.

For energy demand, emerging markets are a near necessity as their demand tends to convert less from services and consumption as in developed markets and into real estate development and industrial demand. Therefore, the sharp drop in EEM over 2018 has also eaten into the perceived demand for crude.

Institutional Positioning Shows Aggressive Bias Lower

Please add a description for the image.

Data source: CFTC, Bloomberg

Money managers have fallen out of love with crude. The chart above shows the net positions, which has fallen steadily over the year gave the move higher in crude through early October was standing on hollow legs.

The positioning data above fails to show the extreme dearth of long-only hedge fund positions, which stands at the lowest levels since 2014as if the 14-month low in net-positions was not bad enough. In other words, from an institutional positioning point of view, the buyers have left the building.

US Crude Oil Stockpiles Are Growing Showing Falling Demand

Please add a description for the image.

Data source: DoE, Bloomberg

Over the last few years, the market has ridden on the news of production curbs from OPEC and strategic alliances. At the start of the week, there was a seeming bounce that was soon erased when news from newly planned production cuts from OPEC may resurface that could last through 2019.

However, this production curb strategy mainly works if we’re only dealing with an oversupply issue and not a problem with demand as well. The chart above shows an inverted view of US stockpiles in blue with crude oil in orange. Since the chart is inverted, the blue line falling is showing a growth in stockpiles that communicates a drop in demand.

Since mid-September supplies have been steadily building, which also shows the divergence of the last really in early October.

Insight from the Futures Curve – Bye-Bye Front Month Premium

Please add a description for the image.

Data Source: Bloomberg

The futures curve is a tool that speculators and hedgers or corporates alike look to as the perceived fair value of an asset at different points in time due to the available information. The back of the curve is often a helpful source of information about sentiment and perceived effects of current policies.

The December 2019 contract that makes up the back of the curve has fallen aggressively, but less so than the front month of December 2018. The chart above shows a spread between the December 2018 WTI crude contracts minus the December 2019 WTI crude contract. A positive number shows a front-month premium, and favors an upward bias in the futures market as the benefits to hold crude exceed the cost to hold. This is no longer the case.

You’ll notice a sharp drop in the spread to negative $1.85 to the lowest level since mid-2016 when Crude was trading in the lower $40s.

So, What Happened?

Crude seemed to be holding up on a potential supply shock from a combination of depletion rates from key OPEC producers as well as Iranian sanctions. However, the falling demand narrative quickly took over at the same time that exceptions were granted by the US on Iranian sanctions.

Crude put many traders (including yours truly) in a tough place as the possible supply shock could have sent prices soaring higher. In fact, there were options contracts being purchased at aggressive volumes that would have paid out on a move above $100/bbl.

Needless to say, this narrative did not play out, but there were bets placed that such a move would happen. Now the market is pricing in a new narrative as the lower-for-longer view is coming back into focus.

Want a technical view on crude, we’ve got you covered: Crude Oil Weekly Technical Outlook– WTI Plunges to Fresh Yearly Lows

More DailyFX Support For Your Trading

Are you looking for longer-term analysis of Crude Oil and other popular markets? Our DailyFX Forecasts for Q4 have a section for each primary currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a surplus of helpful trading tools, indicators, and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities, and our real-time news feedhas intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

Talk markets on twitter @ForexYell