The Facts

US and Canadian shale and oil sands supplies are changing the supply demand dynamics in North America depressing the price of Nymex Crude over coming years. This will also impact African exports to the US which will then be re-directed to Europe and Asia dampening prices in these markets longer term.

The Story

Crude oil peaked back in June of 2008 before the collapse of Lehman Brothers and the Global and fell to below $40 Barrel (Bbl) in early 2009 before rallying all the way to around $115 Bbl in the first quarter of 2011.

Arguably the sharp increase in the price of oil pre-GFC and the sharp fall once the GFC began can largely be explained by a rise in the financialisation of crude and many other Commodity markets. By financialisation I simply mean that the vast majority of trade in these markets is done by traders who are unrelated to the actual production or consumption of the commodity rather they are simply trading to make money.

Leaving aside of the politics of that debate two reports from Reuters and the Wall Street Journal today suggest that the laws of supply and demand are alive and well in Crude markets and that this will have implications for nations, oil traders, oil speculators, and hedgers.

Reuters reports that Goldman Sachs has called an end to the oil price super-cycle on the back of the rise in “unconventional” oil supplies in the United States and Canada. Reuters reports that,

Goldman has been highest predictor among major oil price forecasters but said on Thursday “long-dated” or five-year forward Brent crude may be anchored at about $90 a barrel.

The bank also cut its 2013 Brent forecast to $110 a barrel from $130. Brent trade near $112 on Thursday.

“We expect that going forward long-dated oil prices will be anchored by the potential for substantial growth in crude oil supplies from U.S. shale, Canadian oil sands, and the deepwater. Net, we see a return to a structurally stable, but cyclically tight market,”

So we have a  price rise in Crude which has made the oil sands of Canada and shale oil in the US economic – that is what happens when prices rise. It similar to all of the production coming on line in Africa and elsewhere for Iron Ore. Demand drives prices up for a while but eventually if there is a supply response that can be made it will be made.

Indeed Crude oil production in the US is at its highest levels since 1995 at around 6.6 million Bbl a day.

But this increase in Crude production in the US has implications not only for Nymex but for Brent Crude as well.

The Wall Street Journal reports today that Nigeria is suffering from the increase in US crude production as its exports across the Atlantic slump. The Journal says,

A surge in unconventional U.S. energy production has been a boon for the world’s largest oil-consuming economy, but it could come at a significant cost to Nigeria, which needs to find new buyers for its light, sweet crude as American demand tumbles.

Changes in the destination of Nigerian crude, which contributes roughly 95% of the country’s export earnings, could shift the commodity’s pricing. And it could have a knock-on effect on Brent crude, the benchmark against which a majority of the world’s oil is valued.

The most recent figures from the U.S. Energy Information Administration, published in September, show that just 361,000 barrels a day of Nigerian crude made it across the Atlantic in July, down from 810,000 barrels a day a year earlier and from more than one million barrels a day in July 2010.

There is that word “unconventional” again. Now of course Libya coming back online and the big surge in Iraqi oil over the past few years has also impacted on markets but Nigeria has to sell their oil somewhere and it seems likely that it will be redirected from the US to Europe and thus impact on Brent prices going forward. Equally Nigeria will be pushing exports East toward India and China according to the Journal.

All in all it is probably a recipe for more contracted range trading between $70/75 Bbl and $110/115 in Nymex crude terms over the long term if these fundamental trends play out the way they seem they might.

The Trade

Fundamentals are great they tell a good story – but mostly thats all they tell. What we look for here at MacroFX is when the story and the price action ties up and for that we can see that while Crude lacks momentum for any trade right here and now given this outlook is longer term in nature we can highlight some important levels which could be catalysts for traders to implement positions.

On  a weekly basis there is little momentum in the Nymex Crude whether you look at the ADX, 200 week moving average or the MACD but my JimmyR indicator suggests that the trend is still down.

On the dailies it is a similar story. The ADX says no trend, as does the 200 day moving average, the MACD suggests that price might still go a little higher on this time frame and the JimmyR still says down.

Clearly this is a recipe for range trading but it is also a recipe for a break out and we await that as a catalyst to trade. Levels to watch on the downside are $86-90 to $87.33 Bbl as a close through here would open a move back toward $78/79 Bbl. On the topside a break of $93.70 would open the way for a move to test the 200 day moving average at $95.60 Bbl and above that the long term downtrend at $98.71.

Have a great day.

Greg McKenna

Twitter: @Macro_Forex

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor www.MacroFX.com.au has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.