Bull And Bear: Crude's Late-2018 Rally

Following a tumultuous 2017, WTI crude oil circa 2018 has managed to do something it hadn’t done in three years: breach $70. This year even saw crude accomplish the arguably more difficult feat of remaining above the $60 for the better part of a year, something not seen since the commodity’s benchmark was near $100 a barrel back in 2014.

Now, entering into the last third of 2018, crude looks like it’s eager for a finale as it again flirts with $70. While October NYMEX crude futures contracts are already up to a high of $71.40 as of this writing, there’s still a number of lingering questions about which global catalysts stand to have the strongest effect on oil.

Two divergent forces are at the heart of crude’s future, let’s take a look at the logic behind each.

WTI Bull Thesis: Supply tightens and demand moves to America

A large part of the bull thesis on oil is that the recent geopolitical strategy of the U.S. throwing its weight around will draw buyers to the American oil market. The primary catalyst for this is the resumption of Iranian oil sanctions in November and the threat of recriminations against countries that buy from Iran.

Asian partners like Korea and Japan are adjusting to the abrupt change in policy, and purchasing has declined in the approach to the sanctions deadline. However, Turkey, India, China and even the European Union’s commitment to honoring the sanctions has yet to be set in stone.

Other signals from OPEC members and Russia reveal that supply has remained on a steady uptick after the drawdown of production cuts. Russia revealed its August output was 11.21 million bpd, close to record output, while OPEC. output a though the U.S. stockpiles have diminished slightly, and offshore drilling operations could be affected further by 2018’s storm season

WTI Bear Thesis: Global growth slows, fiscal policy tighten and demand weakens

Alternatively, America’s own strength might end up hurting the oil industry and itself.

The U.S. dollar has shown so much relative strength on the back of promising economic data and low inflation that it might be hard to gin up enough buyers to buoy price. The country’s monetary strength (even as interest rates creep up) is out of step with much of the rest of the world, as European, and Asian central banks brace for a tightening global economic climate.

This price imbalance is especially stark in many emerging markets like Argentina, Brazil, South Africa and India, whose currencies have fallen under the pressure of the USD and driven up the relative cost of the commodity. China, too, is experiencing a slowdown in demand as the country struggles to find a sustainable rate of economic growth while also contending with the aforementioned U.S. trade and diplomatic pressures.

If  countries are constantly being outpriced by a soaring dollar, it won’t take long for oil stockpiles to ratchet up and correct. What appends that scenario is the threat of increased production from OPEC members like Libya and Iraq, which both saw an August uptick in output.

While the big headline in crude is focused on the Iran sanction, oil’s final chapter in 2018 might play out in the currency markets. The key player is the dollar and whether inflationary signals can put a damper on the USD rally and give emerging economies room to breath.

If not, Q4 2018 might be the final chapter in this volume of crude’s goldilocks story for now.