6-month crude oil outlook bearish for now, but watch the dollar
Oil has been in a nice uptrend along a pretty consistent trend line, but eventually I expect it to break out downward.
The EIA predicts an average WTI price of 54.60 next year, with the lowest prices in the first half of the year. US crude inventories have been increasing lately, and should continue to rise. According to the EIA, US crude inventories will continue to increase early in the year, and then will fall in the second half of the year. As inventories gain, prices should fall.
Futures traders are a little more optimistic than the EIA for the front half of 2020, but more pessimistic than the EIA for the back half. An analysis published today at SeekingAlpha titled "Crude Oil: Inventory-Price Modelling Implications For 2020" illustrates how inventories explain about 75% of the variance in oil prices, and inventory forecasts imply a price of about $45 per barrel next September.
Of course, major changes in oil supply due to geopolitical insecurity (e.g. war in Iran or instability in Venezuela) could change the outlook by reducing inventories and driving up prices. Global recession, meanwhile, could change the outlook by reducing demand, increasing inventories, and driving prices down.
Another thing that could change the outlook is the strength or weakness of the dollar. Right now, the US economy is widely expected to grow slower than the global economy in 2020. If the US economy grows faster than expected relative to the global economy, then the dollar could continue to strengthen and oil prices should fall. If the US economy grows slower relative to global growth, the dollar could weaken and oil prices should rise. Similarly, the Fed has been trying to weaken the dollar, so far without a great deal of success. If and when Fed policy finally succeeds at forcing a breakdown in the dollar, oil prices should rise.
Here's the triangle I'm watching on the dollar to see the effect of Fed policies:
But barring a dollar breakdown or a major geopolitical event, I expect oil to eventually fall out of its upward trend.
The EIA predicts an average WTI price of 54.60 next year, with the lowest prices in the first half of the year. US crude inventories have been increasing lately, and should continue to rise. According to the EIA, US crude inventories will continue to increase early in the year, and then will fall in the second half of the year. As inventories gain, prices should fall.
Futures traders are a little more optimistic than the EIA for the front half of 2020, but more pessimistic than the EIA for the back half. An analysis published today at SeekingAlpha titled "Crude Oil: Inventory-Price Modelling Implications For 2020" illustrates how inventories explain about 75% of the variance in oil prices, and inventory forecasts imply a price of about $45 per barrel next September.
Of course, major changes in oil supply due to geopolitical insecurity (e.g. war in Iran or instability in Venezuela) could change the outlook by reducing inventories and driving up prices. Global recession, meanwhile, could change the outlook by reducing demand, increasing inventories, and driving prices down.
Another thing that could change the outlook is the strength or weakness of the dollar. Right now, the US economy is widely expected to grow slower than the global economy in 2020. If the US economy grows faster than expected relative to the global economy, then the dollar could continue to strengthen and oil prices should fall. If the US economy grows slower relative to global growth, the dollar could weaken and oil prices should rise. Similarly, the Fed has been trying to weaken the dollar, so far without a great deal of success. If and when Fed policy finally succeeds at forcing a breakdown in the dollar, oil prices should rise.
Here's the triangle I'm watching on the dollar to see the effect of Fed policies:
But barring a dollar breakdown or a major geopolitical event, I expect oil to eventually fall out of its upward trend.
