Key Oil Price Indicators at the End of 2019

Last week, WTI crude oil prices gained 0.6%—the third consecutive weekly gain. December might be the first month since May 2015 that prices rose in all of the weeks of a month. On December 6, OPEC+ decided to increase the ongoing production cut by 50,000 barrels per day—an important factor behind oil’s rise. Investors who want exposure to oil might look for the United States Oil Fund LP (USO). WTI crude oil futures are the constituents of USO.

The rally in oil prices started towards the end of 2019. This year, WTI and Brent crude oil active averaged $56.97 per barrel and $64.12 per barrel compared to $64.90 per barrel and $71.69 per barrel in 2018, respectively. In the second half of 2019, concerns about rising global oil output dragged crude oil prices.

In September, after Houthis’ drones attack on Saudi Arabia’s oil infrastructure, oil prices rose 15%—the largest single-day rise since 1988. However, the gains eased quickly when Saudi Arabia’s oil production recovered.

The OPEC+ production cut and US sanctions on Iran reduced oil’s supply glut. The protests in Iraq escalated during the last week of November. If the protests in Iraq escalate in 2020, it might impact the oil output.

After Aramco’s listing, Saudi Arabia might persuade OPEC+ members for a production cut beyond March 2020. Higher oil prices would help the country to realize a higher valuation on the stake sale. Saudi Arabia hasn’t announced any plans for an additional stake sale in Aramco. However, the country needs more fiscal stimulus to diversify its economy.

In 2019, active crude oil futures were between $50 and $60. If the 50-DMA (day moving average) moves above the 200-DMA, prices might decisively break out from this range. On Tuesday, the 50-DMA was 1.1% below the 200-DMA.

Since November, oil’s implied volatility has fallen due to the rise in oil prices—an important quantitative indicator for another gain in oil prices.

In December 2017, oil’s implied volatility was at a multiyear low. For the first ten months of 2018, the implied volatility was relatively low, while oil prices moved higher. In November 2018, the implied volatility started to rise and WTI crude oil prices fell as low as $42.36 per barrel in December 2018.

The difference between crude oil inventories and their five-year average is called the “inventories spread.” Usually, the inventories spread and oil prices move in the opposite direction. In the first half of 2018, the inventories spread was negative. Active WTI crude oil futures rose as high as $73.65 per barrel in August.

This year, in many instances, the inventories spread has stayed in the positive territory. In the week ending December 13, the inventories spread expanded to 4%. If the inventories spread expands more in 2020, oil’s rise might not sustain.

The Brent-WTI spread is sensitive to the global oil supply situation. In the past, the spread expanded for any disruption in the global oil supply. The spread moved higher when OPEC members decided to reduce their output in November 2016.

After the additional cut by OPEC+, the spread has started to move higher. On Tuesday, the Brent-WTI spread was at $6.1. The spread has expanded by 90 cents since December 6. Another expansion in the spread could lead to higher US oil exports. To know more, read Brent-WTI Spread Could Impact US Oil Exports.