Crude Oil Six-Month Forecast Weighed by Global Uncertainties
Crude oil prices have bounced back going into the second-half of year, stoked by U.S. dollar weakness paired with the rebound in the world economy, and the rise in global activity may continue to drive the cost of energy higher over the coming months as the recovery gathers pace.
The International Monetary Fund expects the world economy to expand at a faster than initially expected and revised its 2010 GDP estimate to an annualized pace of 4.25% in April versus an initial forecast for a 3.25% advance, led by a 6.3% rise in the emerging and developing countries, while the advanced economies are expected to contribute 2.3% to global growth. However, the European debt crisis has certainly weighed on the outlook for future growth as governments across the globe struggle to manage their public finances, and tightening fiscal policy could lead to a protracted recovery as world officials look to withdraw support for the economy. As a result, the Organization of Petroleum Exporting Countries (OPEC), which accounts for approximately 40% of global outputs, highlighted the risks for a protracted recovery and said it would need to cut production by nearly 70,000 barrels a day to meet future demands as supplies outside of the 12 members increase at a faster pace than anticipated, and the group went onto say that “oil market fundamentals continue to be impacted by the persistent overhang in supply” in its monthly report.
Will Emerging Countries Be Able To Pick Up The Slack For The Advanced Economies?
As the IMF sees the emerging economies leading the global recovery, the rapid expansion in the developing countries could certainly counterbalance the tepid growth in the major industrialized nations as households and businesses within these regions widen their rate of consumption. Economic activity in China has picked up tremendously in 2010, with the growth rate expanding 11.9% in the first quarter to mark the fastest pace of growth in nearly three-years, and the group expects the Asian countries to contribute nearly one-third of global growth in the next five-years as the private sector strengthens. However, as policy makers in China aim to foster a sustainable recovery and avert an asset bubble following the rapid rise in home prices, the government may look to tighten monetary and fiscal policy going forward, which could temper the rise in growth and weigh on consumption. As a result, OPEC anticipates the marked expansion in China to moderate in the second-half of 2010, and the group may look to cut production over the coming months in order to balance supply and demand.
Will OPEC Reduce Supply in 2010?
The Organization of Petroleum Export Countries held a cautious tone in its June oil market report and expects demands from the nations within the Organization for Economic Co-operation and Development to remain negative in the second-half of the year, and are solely relying on sales from outside of the 31 countries as it forecasts global demands to expand 0.95M bbl/d in 2010, which was unchanged from the previous month. At the same time, the group increased its forecast for future production and sees outputs outside of its 12-members increasing 0.64M bbl/d this year amid an upward revision of 0.11M bbl/d from its last report, and the group went onto say that the net effect “would leave no room for additional crude oil supplies in the market” as they aim to keep oil prices afloat. As a result, the group noted outputs required by OPEC may fall an annualized 175,000 bbl/d following the drop over the last two years, and the organization may curb production over the coming months as it sees a risk for a protracted recovery in the world economy. Moreover, the ongoing weakness in the U.S. labor market may continue to drag on the outlook for future demands as the world’s largest economy remains the biggest consumer of oil, and OPEC may cap production in the months ahead as the outlook for future demands remains clouded with uncertainties.
The U.S. Dollar Is The X-Factor.
As the U.S. dollar remains the global trade currency, its performance would certainly have implications for future oil prices, and the uncertainties surrounding the European debt crisis could weigh on commodity prices as the greenback benefits from safe-haven flows. However, as the recovery in North America gathers pace, the Federal Reserve may revise its economic assessment and see scope to normalize monetary policy further in the latter half of 2010, which would lead the strong correlation between the U.S. dollar and risk sentiment to decouple as investors speculate the central bank to lift the benchmark interest rate from zero over the coming months. As a result, fundamental developments and interest rate expectations may play a greater role in driving price action going forward, and the greenback may show a greater reaction to the changes in the economic landscape as investors weigh the outlook for future growth.
Subsequent to the formation of the triple bottom in late 2008/early 2009 where prices bottomed out around $32/bbl, crude oil has managed to find its way to trade around $76/bbl. However, with the recent technical developments, we believe that price action will push lower over the coming months.
We have decided to take a classical technical analysis approach and focus on moving averages as they tend to keep traders in line with the overall trend. At the same time, we used these averages in conjunction with other technical developments in order to develop a precise forecast. In the beginning of May, crude prices slipped below the 200-day simple moving average which is indicative of a major downside move. However, it is noteworthy that prices recently edged above this moving average but remained constrained by the 50-day SMA. Also worth mentioning is the 50-day SMA recently crossing below the 100-day SMA, with the shorter term moving average poised to break below the 200-day average. The development of the latter signal is widely known as the death cross, which is an indication that a bear market is in the horizon.
Meanwhile, crude oil has recently dip below a rising trend line which has held since late September of 2009, providing us with an additional signal that the market is ordained to reverse from its previous bull market in the coming months. All in all, crude oil is destined to push lower, with prices looking to test $72/bbl for support by September before extending its decline, exposing the yearly low.
