Why the Oil Short Has Begun
Over the past year oil has been on a rally fueled by factors such as geopolitical tensions, environmental scares, and growing demand. Investors have had a field day with this as oil future contract volumes have been more active than ever. This provides a good outlook into what seems to be an emerging market inside of a very old one as oil has gathered more and more attention.
On the date of writing this article, WTI crude oil is at $66.25 per barrel which is a very drastic change from the previous week where oil was trading at around $72. Below you can see how much of a change WTI price has undergone in a monthly chart. Nevertheless, the question remains: what is causing this movement?
If you go onto any news website or website for oil and investing news you’ll probably see a headline that says something like, “OPEC deals lead to large drop in oil!” These articles are based on the current events of the past weeks where OPEC and Russia have started to talk about boosting oil production which obviously drove price down. (oilprice.com) These articles are important and topical however, this movement and the future outlook for oil is far more complex than a simple news headline like this.
The tensions in the Middle East have led to a bullish outlook and has created volatility. Normally volatility drives investors away, however, the consensus feeling is still bullish because of these events and other factors. This combined with US-Iran sanctions and a burgeoning Chinese presence in the Middle East is what fuels my prediction of a fall in oil price and a very appealing potential short opportunity over the next year.
With Iran and the United States, we see the US decrease their presence in the Middle East and focus on their production at home. This is key because oil production in the United States has already been boosted to high levels over the past few years (reuters.com). As well with the US nearly out of the Middle East, we’ve seen China come in and try to fill that position. China has been talking with Saudi Arabia, the largest oil exporter in the world to try and make the Chinese currency, the Yuan, the currency upon which oil is weighted (CNBC.com). What this means is that China, the world’s largest oil importer is trying to increase their presence in the Middle East due to the decrease of the American presence in places like Iran and other countries. Iran has also expressed interest in working with Saudi Arabia in the future which could lead to even more cooperation within OPEC and the countries who are largely involved in oil. China’s presence in the Middle East is evidence that more cooperation and therefore lower oil prices may occur over the next year.
As well, inflation is a very large problem which the market has not completely accounted for yet despite these geopolitical events. The graph below from the OPEC report for the month of April in 2018, shows how Saudi Arabia’s oil markets have faced inflation and change in their inflation in such a drastic way.
Photo courtesy of OPEC monthly report for April 2018
What this means is that as time goes on and more reality comes to the oil markets, I predict people will start to realize the increased inflation, react to it, and thus another factor that may drive oil price down occurs.
In closing, the oil rally has been great for investors over the past year and has given this market new life. While this new-found success is very good for markets overall and new investors such as myself, there is a spectre of a likely oil price decrease and an attractive potential short position looming over this market that investors have started to see but are very plausible to continue noticing. Overall, I predict a fall in WTI crude prices over the upcoming year and recommend a short position for anyone wishes to trade these contracts.
You may also be interested in: Crude Oil at $70; A top Down Analysis of its Impacts
Writer: Mason Persaud
Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.