The S&P GSCI Crude Oil Total Return Index (NYSEARCA:OIL-OLD) reflects the returns that are potentially available through an unleveraged investment in the West Texas Intermediate crude oil futures contract. In other words, the return on the index is directly proportional to the return on the value of the crude oil futures contract. Therefore, the decision to invest in this index should be made after analyzing the oil market.
First of all, let's recall what OPEC decided on December 6:
The 7th OPEC and non-OPEC Ministerial Meeting, hereby decided for an additional adjustment of 500 tb/d to the adjustment levels as agreed at the 175th Meeting of the OPEC Conference and 5th OPEC and non-OPEC Ministerial Meeting. These would lead to total adjustments of 1.7 mb/d. In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions, leading to adjustments of more than 2.1 mb.
In other words, everything else being equal, the fall in total production volume versus today will be around 0.5 mb/d and OPEC oil production in Q1 2020 will be about 29.2 mb/d:
Based on these calculations and the latest OPEC forecast regarding the structure of global supply and demand in the oil market, we obtain the following structure of the oil market global balance for the next quarters:
There are two models that allow us to judge how balanced the price of oil is. It is worth noting that these models quite accurately describe the behavior of the oil price over the past eight years.
According to the first model, the OECD commercial closing stock levels at the end of Q3 2019 correspond to Brent oil prices at the level of $58. That is very close to the current price:
However, the stocks do not reflect the changes in the demand. Therefore, I prefer to use the number of days of forward consumption in OECD (stocks divided by daily oil consumption) as the base oil market balance indicator. In this case, the current balanced Brent price is $68, which is also quite close to the current level:
Technically, OIL remains positive and I believe it can reach $12.4 in the horizon of the coming months.
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