Future crude oil prices trading tips

Crude oil prices have come off rapidly over the last week dropping from a seven month high trading above $72 down to just above $68 as a series of negative indicators hit demand.

Crucially the markets do not expect much upside on this, at least in the immediate future. After several months in which the daily pricing lagged the cost of a barrel ordered three months ahead, there is now barely a cigarette paper between them.

Oil remains incredibly opaque of course and susceptible to a huge range of influences. So have we reached an end to the rally, and what can we expect over the next year?

In case anyone needs reminding, the oil price has dropped from a 12-month high of $144 per barrel to a January low of less than a quarter of that at just over $35.

The pricing over the last quarter has almost exactly tracked optimism about the global economy, stimulated by a return of manufacturing activity in Asia, bullish western statements on economic spending plans and the re-entry of money to the markets.

The immediate causes of the sharp fall recently witnessed have been a World Bank downgrade of global growth expectations and political murmurings on both sides of the Atlantic that oil-price speculation would not be allowed to jeopardise recovery.

Frederick Nerbrand, head of global economic strategy at HSBC Private Bank, said that the day-to-day market chatter often tended to obscure a fundamental case for oil.

Oil production operating at a current figure of 86% of capacity still offered a fundamental mis-match between demand, at above 85 million barrels per day, and production at below 84 million barrels daily.

While we do not expect a strong and sustained rally to develop immediately, several positive factors influence our view,’ said Nerbrand.

‘We believe improving investor sentiment, in particular their returning risk appetite, should complement resurgent demand from a global economic recovery that we expect to develop during 2010.

‘We have now moved our long-term outlook on oil to positive, as we believe that growing demand from emerging markets is likely to outpace the decline in demand from developed markets. From a supply perspective, discoveries of oil reserves have been declining since their peak in 1980, leading us to believe that the inelasticity of supplies will persist even as demand continues to grow.

‘In our view, this will inevitably lead to a shortage in oil, supporting higher prices. Throughout the global economic slowdown, oil prices have proved resilient; consequently, we expect even a marginal return of global growth to drive prices higher. Nonetheless, in the short term, we believe oil prices should trade in a narrower range, as the global economy grapples with recession and demand remains subdued.’

On the downside view, analysts have questioned the sustainability of the recent price spike, having risen from $52 over the last three months, and said that that it may have shallow roots. At least some of the uplift has been spurred by Chinese internal issues, such as a strategic switch in its reserves from the dollar to real commodities and a return to activity of factories mothballed over the winter. Neither will last long.   

There is also the issue of the US and its determination to prevent what is widely recognised as speculative investment from pushing the price to anywhere near last year’s peaks and harming the recovery.

The US trade deficit rose from $28.5 billion in March to $29.2 billion in April largely as a result of the higher price of petroleum imports and related products. At $70 a barrel, that shortfall would widen another $10 billion, Capital Economics calculated.   

With a number of one-off factors now coming to an end, a medium-term price range of around $50 a barrel looked reasonable, said Paul Dales, Capital Economics head of US analysis.