Rising stocks imply lower prices
Predicting the price of oil is the combination of science and art. There is myriad of factors that influence the view of those who are involved in oil trading: the economic climate, geopolitical developments, weather, seasonality, or the exchange rate of the dollar. These factors all have a profound impact on the price of oil, and they ultimately shape the oil balance – both supply and demand. The difference between the latter two has a significant impact on oil inventories. A supply shortage will lead to declining stocks whilst excess will result in swelling inventories. The chart above shows the negative relationship between U.S. oil stocks (excluding SPR) and front-month CME Group WTI prices. The higher the inventories the lower the prices, and vice versa. Abundant stockpiles imply secure supply whilst depleted stocks increase anxiety about freely available oil supporting prices.
Once a view is formed on the level of inventories a price direction can be obtained. The EIA believes that U.S. commercial oil inventories will be 1.236 billion bbls by the end of the current year. It is nearly 40 million bbls higher than the end-2022 inventory level. In fact, every quarter of 2023 is expected to see a year-on-year build in commercial stocks. The reason is well-publicized. The monetary tightening undertaken by the central banks of the major economies is widely anticipated to cause economic headwinds that are embodied in sluggish oil demand growth, which is coupled with stable supply. Growing stocks indicate lower prices. The salient question is how low. Comparing the changes in quarterly stocks with the fluctuation of average quarterly WTI prices in the past eight years suggest that the U.S. crude oil marker should price somewhat below last year’s average but above the current curve. Based on the extent of the quarterly builds, WTI should gradually advance from Q1 throughout Q3 before retracing in the last quarter of the year, yet the latter half of 2023 is expected to be somewhat stronger than the first six months.
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