Weekly Asset Heatmap: Oil

Many commentators believe oil will remain at $50-$60 into 2018. Yet, variables abound. Our signals suggest a big move in the price of WTI and Brent this month.


A rise in our WTI and Brent signals suggest a big move in oil markets within the next month.

Salient threads in the digital debate driving this movement include:
  • China, already the world's top crude buyer, is building up regional government-supported mega refineries to produce petrochemicals in a bid to further disrupt the international oil market.
  • According to a Moody's study of 37 exploration and production companies in the U.S. and Canada, oil prices will need to remain consistently above $50 a barrel for shale drillers and oil sands producers to be profitable in the long run.
  • As OPEC production cuts and rising global demand continue to collide with roaring U.S. shale production, many believe oil will remain at $50-$60 a barrel until 2018.
  • At this year's APPEC meeting in Singapore, bullish traders said OPEC and its allies, such as Russia and Mexico, would need to extend output cuts past a March 2018 expiration date to avoid a build-up in inventories.
  • new study by IHS Markit found the Permian Basin in Texas and New Mexico actually contains 60-70 billion barrels of recoverable oil, far more than previously estimated.
Away from geo-politics, looking at the macro drivers of oil, Quant-insight's models suggest that there are two consistent drivers of higher crude prices: higher rate vol across the G4 and lower cross-currency basis swaps. Prior to Monday's fall in crude oil prices, their models were suggesting that WTI prices had close to a positive 5.8% valuation gap (rich) vs. their models.

Predata's country-specific volatility signals suggest recent sanctions on Iran and Venezuela, as well as ongoing disruptions in Iraqi Kurdistan related to the independence movement, will have a huge impact on oil markets. As seen below, our country volatility signals are highly correlated to big moves in Crude Oil futures.