October is not really a good month for crude oil prices. Oil prices got their biggest monthly drop in more than two years. For example, the WTI (West Texas Intermediate crude) dropped by 10.8 % in October. The West African grades prices for Qua Iboe and Nemba are also getting down.
Trafigura and Mercuria traders are assuming that Brent crude oil could rise to
$90 per barrel by the end of December and even pass $100 at the beginning of 2019, as markets tighten once U.S. sanctions against Iran are fully implemented in November.
OPEC as well as Russia are planning to raise their output to counter falling supply from Iran, although no decision was publically made yet. Some sources are saying that OPEC and other producers are willing to raise their output by 500,000 bpd when the worldwide production in June 2018 was around 92,6mbpd.
The oil prices are dropping down Following Trump’s tweets (see below) and intervention in the media, the price of crude oil has decreased significantly. Donald Trump was complaining that the oil prices are too high; moreover, he accused OPEC of pushing oil prices higher, and said that they should lower their prices. He actually expressed his discontent on twitter, after which, the oil prices dropped down and are still going down. He even threaten Middle East to withdraw US military resources if they do not want to cooperate. We assume that Trump’s pressure on OPEC is an attempt to make US crude oil more attractive. For instance, in July 2018 the US production was around 11mbpd and exportation around 1.8mbpd in the half of 2018. In 2018, the US has boosted their exports to Asia, Oceania such as China, South Korea and India by 80% compared to 2017.
To conclude, we think that the West African crude is not the only one which is suffering from Trump’s actions but the crude oil industry as a whole.
The forward curve below represents BRENT CRUDE OIL for year 2019. We chose the BRENT CRUDE as it is a benchmark for West African Crude oil. We can see that the price slightly decreases over time and hence tells us that this forward curve is in backwardation.
As we are in backwardation, we recommend to go short. There is no incentive to store because the price decrease over time. Storing crude would lead to carrying costs, which would not be economically viable.
Sources
Prices falling: https://mobile.reuters.com/article/amp/idUSKCN1N427C
Trump’s Tweets: https://twitter.com/?lang=fr
US export: https://www.hydrocarbonengineering.com/gasprocessing/24092018/eia-crude-oil-was-the-largest-us-petroleum-export-inthe-first-half-of-2018/
World production: https://www.forbes.com/sites/rrapier/2018/06/14/world-setsnew-oil-production-record/#4d589dcd752d
Trump’s pressure on OPEC : https://www.cnbc.com/2018/09/20/trump-wantsopec-to-keep-crude-low-it-cant-do-that-oil-expert-says.html
Brent backwardation: https://www.spglobal.com/platts/en/marketinsights/latest-news/oil/091218-brent-cfd-curve-moves-into-backwardationamid-bullish-crude-oil-outlook
Brent Futrue contract: https://www.theice.com/products/219/Brent-CrudeFutures/data?marketId=222467