To answer the directional question on crude oil prices one needs to form a view on the following drivers and the following countries:
- What is the outlook of the global economy? If you believe that the global economy is picking up and that there is likely to be increased economic activity leading to a potential increase in the demand for crude oil one would expect prices to rise or in the very least remain at current levels. Look no further than China to answer this question.
- What is the outlook for the US dollar? Will it appreciate, depreciate further or remain at current levels? More importantly is this relationship true correlation at work or simply a translation adjustment?
- Does the same hold true for the correlation with S&P 500 index?
- What is the remaining appetite of crude oil consumer’s inventory build up? When the prices of crude oil fell countries started to increase their stockpiles of oil. However, in the face of weakened demand net importers of crude may be nearing their holding thresholds. If inventory build up slows down what would be the impact on future contract spreads and support level for prices?
What is the threshold revenue level that will force OPEC nations to review their current quotas regarding spare capacity in light of dampened demand, lower trade levels and falling or static prices? Look no further than Saudi Arabia and Iran.