This has been a big year for crude oil. Fueled by evolving international trade, economic expansion, and disruptions to the supply chain, the pricing of West Texas Intermediate (WTI) futures in 2018 have extended an uptrend that began in 2016.
Given the prevailing geopolitical and economic factors, the oil futures outlook for winter 2018/19 is currently perceived by many industry professionals as bullish. Is this viewpoint accurate? Let’s dig into the global oil market dynamic and determine whether consensus estimates are backed by ample supporting evidence.
WTI Futures Market Recap 2018
The summer months proved to be exceptionally strong for WTI crude oil futures, with both the December 2018 and January 2019 contracts rallying above the key $75.00 psychological level. Energy traders bid WTI futures en masse, with many institutional participants promoting a bullish oil futures outlook. Investment banks Goldman Sachs and Citi offered predictions that oil was to remain in the $78 to $82 per barrel range throughout the calendar year.
However, these estimates run well above official projections from the Energy Information Administration (EIA). Here is a summary of EIA WTI historical data and forecasts since the bull market in oil began in 2016:
|Year||Average Price (USD Per Barrel)|
So, there is a considerable discrepancy between the WTI crude oil futures outlook of leading investment banks and the EIA. Both have 2018 values rising significantly year-over-year. Regardless, estimates of $82 and $68.46 are very different values, leaving room for debate.
Market Fundamentals for Winter 2018/19
The global crude oil markets are impacted greatly by fundamentals. As with any commodity, factors such as natural disasters, transportation costs, and evolving supply/demand levels largely dictate pricing. However, when it comes to crafting a WTI oil futures outlook, a trader has to also take into account geopolitics and the impact of the petrodollar system of oil valuation.The billion dollar question is this ― are the leading investment banks and EIA correct with their bullish views of the WTI crude oil market? The following factors will certainly play big roles in determining an ultimate answer:
- A stronger dollar: The international oil trade is conducted via the petrodollar system. This means that every barrel of WTI is denominated and transacted in U.S. dollars. Accordingly, a stronger dollar can negatively influence pricing. 2018 has shown robust growth in the USD’s value abroad, led by a policy of monetary tightening from the U.S. Federal Reserve (FED). According to FED projections dated September 2018, gradual interest rate hikes are probable over the next 18 months. If accurate, rising rates will serve to strengthen the USD and hinder commodity pricing.
- Limited supply: Production cuts from OPEC and sanctions against Iran have been the primary supply chain issues for summer/fall of 2018. Pledged cuts from both OPEC and non-OPEC nations are to remain in place until January of 2019. This agreement has been a primary catalyst for the year long WTI price appreciation. In addition, open-ended U.S. sanctions against Iran have furthered concerns over shrinking output from the Middle East region.
- Economic growth: Economic growth spikes both industrial and consumer demand for crude oil. The robust two-year U.S. economic expansion been an integral part of the rise in WTI crude pricing. However, the ongoing U.S./China trade war threatens to hamper growth levels of the two largest economies in the world. In the event that an economic contraction occurs on a global scale stemming from trade war fallout, WTI pricing may suffer due to lagging international demand.
Each of these factors is poised to influence the pricing of WTI crude oil futures to some degree. In the event that none or all of these items comes to pass, we may see a very different global oil market by spring of 2019.
Getting Started in the Energies Markets: Crafting Your Own Oil Futures Outlook
One of the great things about futures trading is that no matter what analysts from Goldman Sachs or the EIA view as probable, there’s still room to profit. Whether prices go up or down, a well-versed retail futures trader has an opportunity to post nice gains by using the flexibility of oil futures products.For more information on how to incorporate WTI futures into your portfolio, contact the team at Daniels Trading. For more than two decades, Daniels has been active in the futures industry, including the vast offerings of the global oil markets.