Deja Vu Into 2014: What about oil prices?



Last week, oil prices fell to an eight-month level.

Brent and West Texas Intermediate oil prices have lost 9.2% and 12.3% since their October 3rd is high.

GraphCrude oil information in Brent YCharts pricing information

Last week, oil prices even touched on an eight-month cut, as they recorded a 17-percent drop from record intraday increases. This not only increases the level of nervousness (because poor memories of the fall in 2014 are still fresh), but also increases the pressure on some of the already emphasized actors / debt in the energy sector (XLE).

In this recent negative oil trend, three factors play, not only touching, but also trying to answer the question in the title.


World oil supply (OIL, USO) continues to increase and exceeds 100 MMbbl for the first time since both OPEC and Russia recorded record results.

The production of the OPEC cartel of 15 members reached a two-year high, as Saudi Arabia (KSA) and Angola replaced the lower level of production published by Iran before the US imposed sanctions that will enter into force this week.

Source: OPEC data from September 2018

According to Bloomberg's report, OPEC increased its production to its highest level in November of last month (October). The average production of the cartel increased by 430 thousand barrels per day, which daily led to 33.33 million barrels per day.

Saudi Arabia is responsible for most of the increase in production, as in October it increased production by 150,000 barrels per day to 10,68 million barrels. That is the highest output level since 1962!

Oil production in Russia (RSX, ERUS) reached a thirty year high. This is the highest level of production that Russia has ever recorded since the Soviet Union.

Let's not forget that the United States is now the world's largest oil producer, which for the first time since 1973 takes over Saudi Arabia and Russia.

The US now produces ~ 11 million barrels of oil a day.

The result of the image is the largest oil producer

Nonetheless, an excessive supply is not the only factor that plays a role in this.

Growth / demand

The second factor is demand.

Many signs indicate a slowdown in economic growth and, if so, it is expected to reduce demand for raw materials (DBC, GSG) in general and especially oil.

Recall that growth in Europe (VGK, EZU, HEDJ, FEZ) in the last quarter was the lowest since the second quarter of 2014.

Meanwhile, the Purchasing Production Index published in recent days in China shows that the second largest economy in the world is slowing down (at the margins of the mark 50 or 50) and in some aspects, for example, new export orders that already deliver contracts (under 50 words).

Picture for China pmi Source: Bespoke Investment Group

Central banks

Another factor that puts pressure on raw material / oil prices is a decline in central bank support. Simply cheap money money had two main consequences:

1. Increase in prices of real estate and raw materials. The alarming monetary policies of the major central banks – the Fed in the US and, on the other, the ECB in Europe – are now threatening to stop this party.

As the Fed and other central banks are striving to tighten their monetary policies in an attempt to fight inflation, there is an increase in the potential for a rebound in commodity prices.

Please note that the decline in commodity prices seen in 2014 began weeks after the Fed announced the end of the last redemption program.

2. Weak US Dollar (UUP). The persistent growth of US debt in 2018 begins with it.

GraphUSC data from YCharts

Technically speaking

Oil has recently broken the key levels of support, but now it is being traded for more than a year under its 200-DMA. Oil prices also broke up the upward trend that began in early 2016.

Looking at the past decade, the current revision brings oil prices into an interesting area that looks like to do or break down $ 60.

XLE, the ETF that follows the energy sector, is trading 15% lower than its 52-week high (achieved five months ago). In fact, the ETF fell by about 18% in October when it fell from $ 78.36 (October 9, 2018) to $ 64.37 (October 29, 2018)

GraphXLE data YCharts

Is the sun adjusting to oil prices?

The lower level of production, the expected slowdown in global economic activity and the tightening of monetary policies by the central central banks play an important role in the recent decline in oil prices.

The weak performance of equity markets (SPY, DIA, QQQ, IWM) has certainly not helped much during the red October.

Oil, Photo: Yizh

Nonetheless, it is important to remember that the sanctions for Iran, which will enter into force this week, will be affected.

If the US and China (MCHI, FXI) reach a very necessary / expected trade agreement (or at least reduce the tension of a trade war), capital markets – in particular products – will be strongly encouraged.

Despite the oil prices that traded with their recent heights of about $ 11, it's important to note that the trend is still willing and that we still see a "higher up, higher lower" on a multi-year basis.

GraphCrude oil information in Brent YCharts pricing information

In the long run, oil prices remain, as there are some important events and milestones in this month that lead us to make sure that the long-term trend is still our best friend.

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