What Inventory Level Should OPEC Target?

Robert Boslego - INO.com Contributor - Energies - OPEC


On November 30, 2016, OPEC’s press release announcing the supply target of 32.5 million barrels per day included the following reference to inventories:

“The numbers underscore that the market rebalancing is underway, but the Conference stressed that OECD and non-OECD inventories still stand well above the five-year average. The Conference said it was vital that stock levels were drawn down to normal levels.”

Since the middle of 2017, OPEC has compared the OECD inventories to the five-year average, which had been 2010 to 2015. At some point in 2017, OPEC adjusted the five-year average to include 2011 to 2016. In doing so, it included two-and-a-half years of glutted (not normal) inventory levels. The effect was to make current levels appear to be closer to “normal” levels.

Given that OECD inventories are approaching the elevated five-year average, Saudi Energy Minister Khalid al-Falih has recently questioned that yardstick.

"Do we need to adjust for rising demand and look at forward day cover? How do we deal with non-OECD inventory? (It's) less transparent and reliable,” Falih said. “We have to think of the global market, the center of demand has shifted from OECD to non-OECD.”

Analytical Findings

Using historical supply-demand data and prices, I found a correlation between stocks and prices over time, but it is far from precise. That makes sense because price behavior is much more complex than using one measurement to define it. Market sentiment and positioning tend to cause prices to overshoot and undershoot equilibrium prices. To paraphrase the Noble Prize-winning economist Robert Shiller, prices are more volatile than the fundamentals imply.

Using monthly data from January 2008 through December 2017 (a full 10-year period), I found a -79% correlation. The Cartesian coordinate graph is depicted below:

OPEC

I developed a simple linear regression to fit prices, given the inventory level, and graphed the actual prices with fitted prices:

OPEC

This illustrates how far prices can travel from an equilibrium price, especially in 2008-09. On the other hand, the fitted prices do match up with actual prices over time. And the December 2017 fitted price ($61) is quite close to the actual price ($58).

This historical analysis begs the question, where are prices likely to go in 2018 and 2019? It also serves as a guide for understanding what stock level OPEC+ needs to achieve by withholding supplies.

Conclusions

To answer the first question, I used EIA’s STEO forecast of OECD stocks for 2018 and 2019. The forecast shows stocks bottoming in February, which would correspond to a topping of prices at $63.76, using this methodology. It implies that the $66.66 reached in January is likely to be the peak for 2018 and 2019, with prices dropping back into the lower $40s next year.

OPEC

I also included EIA’s own price forecast on the graph for comparison. It shows similar expectations for the first half of 2018, but that prices will hold above $55 for the forecast period.

Regarding OPEC’s target, the regression shows that if inventories remain right about where they were at end-December (2.870 billion), the WTI price would remain at $60/b. If it wants $70/b, it needs to get OECD stocks to drop to about 2.800 billion. By the way, the latest 5-year monthly moving average is at 2.830 billion.

This model is very simplistic and does not include the impact of trader positioning and sentiment, which I believe are highly influential to the price. For example, the large drop in prices during the first week of February illustrated that factor. I use my Vertical Risk Management model to assess sentiment for positioning.

The other qualification is that the marginal cost of production and the timing of supply response have changed greatly due to the shale oil revolution. The large inventory of DUCs and much faster response of short-cycle oil has changed the market. For those reasons, lower inventories are required to support the same price. On the other hand, there is much more demand at the same price than compared to five to ten years ago. On balance, those two factors may be doing a good job canceling each other out since my regression using forward cover, instead of stocks, produced a lower correlation.

Check back to see my next post!

Best,
Robert Boslego
INO.com Contributor - Energies

Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Bitcoin Mounts A Comeback

Hello traders everywhere. Bitcoin mounts a comeback and is on the rise for the ninth day in the last ten pushing through it's 50-day SMA where resistance had been located. Is this the new level of support? It's too soon to tell, but after rebounding off the 200-day SMA, it very well may be.

After a crash in January wiped out all of Bitcoin's gains from its record run in December it found support in mid-February at the 200-day SMA around the 7,800 level. Since then it has traded in a tight range before breaking out today and issuing a new green weekly Trade Triangle.

That drop coincided with statements by many analysts and market watchdogs that seemed to offer implied acceptance that the assets won't be regulated out of existence.

Still, until regulators gain a better grip on them, digital currencies will struggle for broader acceptance in mainstream finance and media.
Bitcoin Mounts A Comeback

Wal-Mart Disappoints

Wal-Mart (WMT) is experiencing its largest intraday percentage fall in more than two years. The move down comes as they reported a lower-than-expected profit and posted a sharp decline in online sales growth during the holiday period. Its shares slumped 9.4%.

Other retailers including Target (TGT), Kroger (KR) and Costco Wholesale (COST) fell between 1.3% and 3.7%, dragging the S&P consumer staples SPLICES index down 1.62%.

Key Levels To Watch This Week:

Continue reading "Bitcoin Mounts A Comeback"

S&P 500 Consolidates, Is Another Drop Ahead

Aibek Burabayev - INO.com Contributor - Metals - S&P 500 Consolidates


In this post, I will share with you two maps as the S&P 500 consolidates to address two questions that are probably on your mind these days. The first is related to the long-term trend, shall we consider that significant ten percent drop that started at the end of January as a threshold for the long-term Bear Face? And the second question is related to the current situation, will this robust recovery continue further?

Let’s be diligent and answer those questions one by one.

Chart 1. S&P 500 Monthly: Consolidation Not A Reversal Yet

S&P 500 Consolidates
Chart courtesy of tradingview.com

First of all, I would like to draw your attention to the black long-term trendline support, which starts post Great Recession period. The S&P 500 is far above this trigger, and I guess that even the current consolidation could hardly reach it. So, for the long term Bear Face to start sellers should push the index below that trendline, which currently sits at the $2100 mark. As this is not the case now, there is no reason for panic then. Continue reading "S&P 500 Consolidates, Is Another Drop Ahead"

Weekly Futures Recap With Mike Seery

We've asked Michael Seery of SEERYFUTURES.COM to give our INO readers a weekly recap of the Futures market. He has been Senior Analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.

Michael frequently appears on multiple business networks including Bloomberg news, Fox Business, CNBC Worldwide, CNN Business, and Bloomberg TV. He is also a guest on First Business, which is a national and internationally syndicated business show.

Silver Futures

The silver price for the March contract settled last Friday in New York at 16.13 an ounce while currently trading at 16.76 up about 60 cents for the trading week due to the weakness in the U.S. dollar also coupled with a higher than expected CPI inflation report sending silver prices near a two-week high. I'm not involved in silver & if you have read my previous blogs, you understand that longer-term I am bullish silver as I think its extraordinarily cheap and if you're not a trader but an investor I still think prices will head into the $20 level later this year. Silver prices are still slightly below their 20 & 100-day moving average as this market really has been choppy over the last six months with very little trend. I think that will change as I will not take a short position as I do think the downside is very limited. The U.S. dollar hit a three-year low this week as that is helping keep a floor under silver prices and many other sectors, but for the bullish momentum to continue prices have to crack the 17.50 level as the volatility is starting to increase and should become more violent down the road. Growth in the United States and worldwide is coming back as the tax cuts will certainly push the economy higher in my opinion coupled with the fact of the massive infrastructure plan which is going to help lift commodities. I do think almost all asset classes will continue to climb as the stagnant economy is behind us the 1st time in nearly a decade.
TREND: MIXED
CHART STRUCTURE: POOR
VOLATILITY: INCREASING

Continue reading "Weekly Futures Recap With Mike Seery"

No Bitcoin ETF Yet, But There Are Blockchain ETFs

Matt Thalman - INO.com Contributor - Blockchain ETFs


While the Securities and Exchange Commission has yet to approve an actual Bitcoin ETF, it is allowing investors to buy shares of ETF’s which are focused on the technology which makes cryptocurrencies tick, the blockchain.

After the explosion of Bitcoin back in the fall when the price of one coin jumped from around $4,000 to over $19,000, a number of different companies began clamoring to get involved in cryptocurrencies directly or just in the blockchain technology, and that is where these Exchange Traded Funds are focused. The thinking is that while you may not want to invest directly in a cryptocurrency, you may still want exposure to it through the businesses that help it operate.

For example, you could buy Square Inc. (SQ), the payment processing company that a few weeks ago announced it would now allow customers to pay with Bitcoin. Or perhaps it is through a less direct method of buying shares of NVIDIA (NVDA), the semiconductor company, which produces the microprocessors that are needed to make cryptocurrencies a reality. Or lastly, perhaps it just a previous beverage company, Long Island Iced Tea Corp. that now wants to get into blockchain and changes its name out of the blue to Long Blockchain Corp. (LBCC).

The first blockchain ETF to hit the market was Continue reading "No Bitcoin ETF Yet, But There Are Blockchain ETFs"