Like any other asset, crude oil trades on supply as well as demand. And while an improving U.S. economy can be expected to boost the demand for oil, a stronger supply picture should take any wind out of oil’s sales in 2014.
“Although the U.S. economic growth story might make it seem as though rising petroleum demand should lift prices, the uptrend in U.S. crude oil production is likely to be the dominant fundamental factor for the oil market in 2014,” Tim Evans, energy futures specialist at Citi Futures, wrote to CNBC.com. “Four-week average U.S. crude oil production is running some 1.2 million barrels per day, or 18 percent higher than a year ago—more than enough to outpace demand.”
“This is a commodity that’s priced off of logistics,” said Stephen Schork, the editor of the Schork Report. “We know that North America is awash in oil,” he said, making the most important question how easily it can be moved to market.
Consequently, Schork will be closely watching progress on the Keystone Pipeline system (which he said is starting to resemble a “Frankenstein pipeline”), as well as on the proposal to build a pipeline carrying oil from Alberta, Calgary, to Kitimat, British Columbia.
“You certainly don’t want to buy a futures contract on the idea that demand is improving, and now we’re off to the races,” Schork said.
West Texas Intermediate (WTI) “has not traded on fundamentals for many years because of the glut situation, and now WTI is going to start trading closer to fundamentals,” he added. “But that said, demand is still being trumped by supply.”
For Robert Yawger, Mizuho’s director of energy futures in New York, the battle lines between an improving economy and strengthening supply have been firmly drawn.
“There’s a battle royal between the two, and I guarantee that everything in this industry is trying to figure it out,” he said. “The U.S. economy is on a roll right now, and if equities manage to take off as a function of the economy, it will add a degree of a support. But that will be in battle with a supply scenario that is very healthy.”
Like Evans and Schork, Yawger said supply would rule the day.
Read the rest of this article on CNBC’s website.
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