Crude Surges Amid More Warnings of an Imminent Price Drop

Wednesday January 3, 2018

Another topsy turvy day in the crude price market saw West Texas Intermediate reverse earlier losses this week and surge on Wednesday by over 2 percent, and this in turn has caused some experts to also reverse the growing sentiment that prices will remain range bound at best and drop to $40 at worst in 2018.

On the strength of strong U.S. manufacturing data and figures showing unemployment in Germany at record low levels, WTI settled up $1.26 to $61.63 per barrel, the best closing price since December of 2014; Brent settled up $1.27 to $67.84.

John Kilduff, founding partner at Again Capital, contradicted his earlier stand that 2018 may well be a rough road for crude by declaring that the data "speaks to something we don't talk about a lot, which is the demand side of the equation," and he speculated that Brent could be headed toward $70 per barrel, while WTI may break into the $65 to $67 range.

Also said to be a factor in Wednesday's market showing was Iran's Revolutionary Guards deploying forces to quash anti-government unrest in the Islamic republic.

Unsurprisingly, along with the gains came the familiar worry that oil above $61 will trigger U.S. shale producers to increase output, thus jeopardizing the progress being made in returning global supply and demand to healthy levels; Bloomberg noted that oil executives in a Dallas Federal Reserve survey said prices above $61 were required to justify more shale exploration and that if it crossed the $66 mark, even more executives would leap into action.

While outsiders may wonder what all the worry is about in a market that could easily go south in the space of a day, and as far as Matt Smith, director of commodity research at ClipperData, is concerned, prices have nowhere to go at this point but down.

That's because hedge funds and other money managers raised their long positions, or bets that crude prices will keep going up, to the highest levels in 2017, and this represents the biggest risk to oil prices in the near term: "Everybody that wants to be long is long, and so all that can be done now is that it can be sold,.

"And so we should see those net long positions unwind; that could present some downside risk."

But as always, there are no shortage of contrary opinions about price trajectory, and on Wednesday Yoon Chou Chong, head of Asian equities at Natixis Asset Management, named commodities as a top trade for 2018: "The $80 mark ... (doesn't) sound too preposterous, actually," and he explained that restrained production among major oil producers (presumably meaning members of the Organization of the Petroleum Exporting Countries) and the "greater impetus" of Saudi Arabia to maintain stability ahead of its initial public offering of state-run Saudi Aramco will support prices this year.

Less that 24 hours before crude exceeded $61 per barrel on Wednesday, Moody's Investor Service pegged oil in the range of $40 to $60 per barrel in 2018 due to "increasing U.S. shale production, reduced but still significant global supplies, and potential non-compliance with agreed production cuts - especially if demand growth is more tepid."