Slow Global Demand and Higher Inventory Bearish for Oil
Oil drives the world.
But the problem now is that the industry is building up an excess inventory in available oil while global demand is dwindling, as the global economy continues to struggle with the aftermath of the Great Recession in 2008. The result: lower oil prices.
Some argue oil prices will easily rally back, but I’m not convinced, based on both the fundamental and technical pictures.
On the chart, the near-term technical outlook for oil prices is bearish. Spot oil prices are below $90.00 a barrel for West Texas Intermediate (WTI) oil, and they’re edging lower to the mid-$80.00 range.
Spot oil prices have recorded 10 new lows and five new highs over the past three months, according to data from Barchart.com. Over the past year, spot oil made 21 new lows to go along with only eight new highs. It’s clear that the market bias is negative on oil prices.
Based on the spot high of $106.16, reached on May 1, 2012, the spot WTI oil price is down 18.3% as of Thursday, which is nearing the official definition of a bear market.
The chart of the WTI spot oil price below shows some indecision, according to my technical analysis.
Chart courtesy of www.StockCharts.com
The fundamental side is also helping to confirm a potential downward pressure on oil prices.
We all know that oil is one of the most volatile of the commodities, fluctuating with the prospects of the global economy and, of course, the happenings in the Middle East.
On the supply side, there is some calm in the Middle East, but the tensions in North Korea are real. But then, of course, the country’s leader, Kim Jong-un, may be playing mind games with the United States and South Korea.
In addition, America is now buying less oil from the Organization of the Petroleum Exporting Countries (OPEC) than it has in the past, given the move to techniques in fracking, the process of extracting natural gas from rock layers, and the oil flowing in from the Canadian tar sands. What this shift means is that whatever the oil cartel OPEC does, it will have a lesser impact on our oil prices than its actions have had in the past.
Just last week, Saudi Arabia, the largest member of OPEC, suggested that oil prices need to be up to at least $100.00 a barrel. To achieve this, OPEC may look at cutting back on its production quota. The risk is that given the fragile global economy, it may not be wise to pull back on oil production.
On the demand side, China announced a softer-than-expected first-quarter gross domestic product (GDP), which could affect the demand for oil from not only China but Asia as well.
Oil demand is weak. The International Energy Agency (IEA) predicts that this year could be the third straight year of soft demand. (Source: “IEA Release April Oil Market Report,” International Energy Agency web site, April 11, 2013, last accessed April 21, 2013.) The report named the issues in Europe as a key factor for the soft demand.
Even in the United States, oil stocks are declining, with 387.6 million barrels in stock as of April 12, 2013, up from 369.0 million barrels a year earlier. (Source: U.S. Energy Information Administration web site, last accessed April 21, 2013.)
Given the bearish technical and fundamental pictures, I would be cautious at this time. But if you do trade oil, you may want to buy on weakness and sell on a rally. Alternatively, a break below $80.00 could drive oil down to $60.00, providing a short-selling opportunity.