Crude Oil: Bullish Spring Cycle -- or Something Else?
Seasonal, political and technical factors in focus
by Steve Craig
Updated: May 18, 2018
With gas prices approaching $3 a gallon, it's time to talk about the trend in crude oil. ElliottWaveTV asked Steve Craig, editor of our Energy Pro Service, for his take on the seasonal, political and other factors making the rounds in the oil market.
Dana: Hi, I am Dana Weeks, and joining me by phone today is Steve Craig, Elliott Wave International's Chief Energy Analyst, and Editor of Pro Service. So, Steve why does it seem that crude tends to get active heading into the spring and summer, is there a seasonal cycle at work?
Steve: There is indeed, and it's commonly referred to as the summer driving season. That's easily the strongest seasonal period for gasoline demand as families take to the road for vacation while the kiddos are out of school. The term is a bit of a misnomer, however, while it's true that refiners aim to have ample supply available for peak season driving demand, the process actually begins in early spring. Refineries must curb operations and retool so that they can shift from maximizing diesel fuel and heating oil production to maximizing gasoline production. Now the financial decisions vary and they're much more complex than this, but refiners tend to cut back on crude oil purchases in anticipation of the downtime. Now when they resume operations, the tendency is for oil prices, and as a consequence gasoline prices, to rise. While rallies can be quite pronounced it's not an every year occurrence. For example, in 2014, 15, and 16 oil prices rose, but they were down in 2017. Thus far this year prices are responding to the seasonal norm.
Dana: And Steve, what is your take on the U.S. pulling out of the Iranian nuclear deal?
Steve: That's obviously the big question roiling the oil markets. According to the U.S. Energy Information Administration, Iran is the world's fifth-largest producer and accounts for about five percent of global output. Now I've seen estimates that suggest if the U.S. were to reimpose sanctions up to a million barrels or so a day could come off the market and that equates to roughly one percent of global consumption. The other parties to the deal, mainly Europe, China, and Russia want to keep the deal in place and it appears that Iran does as well. But let's say that Iranian oil exports do fall, then you get into a litany of questions. What will OPEC do, well they obviously have plenty of spare capacity with the nearly 1.8 million barrels a day of production cuts. Then you've got to ask, well how fast could the U.S. and other non-OPEC countries ramp up production? Perhaps the bigger question is whether the U.S. is going to take a more adversarial role towards Iran, such as the naval blockade that would further reduce oil exports. What if it escalates into armed conflict? What would Congress do? How would the American people react? What would global leaders' response be? What if Israel or Saudi Arabia strike Iran? What if North Korea talks disintegrate? What if, what if, what if. Unfortunately, I don't have a crystal ball and to the best of my knowledge nobody else does either. The next best thing, however, is a proper application of the Elliott Wave model. While I haven't caught every twist and turn along the way, the strength we've seen is right in line with our bullish forecast, dating back to the 2016 low.
Dana: And last question on crude, while it has been rallying as forecast since 2016, you argue that it is
Editor's note: In the full version of this interview Steve gives you his forecast for crude, RBOB and heating oil. The full version is reserved for EWI subscribers; learn more about Energy Pro Service below.
Oil... Gas... ETFs... What'll Be Your Next "Homerun" Trade?
Energy can be volatile -- and that's a good thing! Volatility means opportunity. Let new intraday and daily Energy Pro Service forecasts be your guide to the next major energy move.
Also available on these platforms