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Fundamental Analysis and Price Evaluation of WTI

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(edited)

Dec 22 2019

     I'll be using a 4-week average of EIA data ending tbe second week of December to compare the Supply/Demand for WTI from 2019 to 2018 along with the price of WTI. 

   Demand for WTI is composed of two variables; they are US refinery run rates and US exports of crude. For the 4-week period ending Dec 14,2018  US refinery run rates averaged 17.471mbd and US crude exports averaged 2.561mbd to average 20,032mbd for the the 4-week period ending Dec 14,2018. Demand for the 4-week period ending Dec 13,2019 was 16.572mbd in refinery runs and 3.412mbd in US crude exports to average 19.984mbd. Although slight, demand for WTI over the last 4 weeks as compared to the same 4 week period in 2018 fell by 48kbd. 

   In Econ 101 when demand goes down that puts downward pressure on price. Demand was down 0.23% year-over-year.  That would indicate a 2019 price of WTI very close to the 2018 price of WTI if supply stays relatively constant.

   Supply for WTI is composed of two variables. They are US crude production and Imports of crude oil. For the 4-week period ending Dec 14,2018  US crude production averaged 11.65mbd. US crude imports averaged 7.549mbd for a total supply for WTI for 4-week data a year ago of 19,199mbd. Supply for the last 4 weeks since Dec 13,2019 averaged 12.85mbd of production and 6.411 mbd to total 19.261mbd. Year over year supply increased. Very little, but an increase just the same.

  So what does Econ 101 tells us. When supply for a product goes up this puts downward pressure on price. 

   So the two economic laws pertaining to WTI both themselves would indicate a price of WTI Dec 2019 very close to the price of WTI Dec 2018. Combine the two laws and a lower price for Dec 2019 as compared to Dec 2018 would have a 75% probability. So lets check price. 

  When EIA came out on Dec 18 2018 WTI had opened at $45.93. Traded between 48.00 and 45.93 and closed at 47.20. A year later WTI opened at $60.55. Traded between 61.18 and 60.32 and closed at 60.93. That's a 30% gain with fundamentals basically identical to last year's maybe slightly weaker even. Not much. 

  Maybe it's an inventory issue. Inventory was at 441,457 on Dec 14 2018. A year later it's at 446,833. Higher. Bearish. 

 I'm short 6 March contracts at an average of 57.98. Also long 2 Feb contracts with Feb 58 calls written against them at $3.00.

 

Edited by Gary LeBlanc

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A big factor is "sentiment".  With all this extra money coming onto the playing field, the future looks bright to a lot of folks.  "Value" doesn't show its true colors with so many riding the stock market gains.  We may see WTI continue to rise.

Central Banks have been injecting money into the economy at incredible rates.  Since September, the Federal Reserve has pumped in around 380 billion with it "Repo" overnight rates. 

Lance Roberts out of Houston has a good article with charts.  Note how stocks gained every week, except the week that The Fed did not inject money.    https://www.zerohedge.com/markets/market-melts-fed-turns-liquidity-firehose

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All good things must come to an end.

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