Our crude oil price forecast for 2022
The evolution of oil prices is of interest not only to investors who want to position themselves or are already positioning themselves in the energy market. Oil plays a unique role in the world economy as the main source of energy in the world. When its price rises, it tends to fuel inflation. When its price goes down, it encourages deflation. In this article, we give you our crude oil price forecast for 2022. We will discuss both the fundamental reasons and the signals identified by technical analysis.
Oil price forecast
Types of oil
Brent and West Texas Intermediate brands are the most traded grades of oil in the financial markets. West Texas Intermediate operates in the USA. Brent operates in the North Sea. Each has its own price.
West Texas Intermediate
West Texas Intermediate (WTI) is a light crude oil grade ideal for refining and gasoline production. As the name suggests, WTI is produced from US oil fields. It serves as the main benchmark in setting the price of crude oil. It also serves as the basis for futures contracts traded on the New York Mercantile Exchange (NYMEX). However, while physical delivery of the underlying asset is theoretically possible, with LYNX a futures position that is expiring is automatically closed to avoid physical delivery.
Brent oil is the main benchmark in Europe, Africa and the Middle East. Its name is an abbreviation for various oil-bearing geological formations in the North Sea. The Royal Dutch Shell oil field was once one of the UK's most productive oil fields, but since then most of the drilling rigs have failed. This reference oil is available on the TWS trading platform as Brent (BZ) crude oil.
The correlation between the price movements of these two futures contracts is high, although in the past the price of Brent crude oil could be more than $10 higher than the price of crude oil. Differences in prices can be explained by supply and demand, as well as the cost of shipping or storing oil. Investors can also benefit from predicting the spread (price difference) of these two futures.
How have oil prices changed in recent years?
The price of a barrel of Brent oil at the end of 2021 was $77.78. The same barrel cost $51.80 at the end of December 2020. This is 50% more than in a year. Crude oil prices have risen steadily since April 2020. Because the world's oil reserves continue to run out. According to an Energy Information Agency (EIA) report, commercial oil inventories in OECD countries fell to 2.68 billion barrels, the lowest level since mid-2019. a sharp increase in demand for fuel. This forced private companies to invest in their shares. Some states plan to use their strategic reserves to fuel the market and curb price increases that are fueling runaway inflation.
Relationship between supply and demand
Demand in the crude oil market currently remains high. Because the global economy, and the US economy in particular, is doing well. On January 27, a preliminary report from the Bureau of Economic Analysis showed that in the fourth quarter of 2021, the annual GDP growth rate of the United States was 6.9%. This is the highest figure recorded by economists since the presidency of Ronald Reagan. However, these good numbers from the world's largest consumer of oil are in a difficult context. The Omicron coronavirus variant continues to cause supply and recruitment difficulties. But these obstacles only underline the strength of economic growth because it was able to overcome them.
The Federal Reserve has hinted that it will repeatedly raise the key rate in 2022 to fight inflation. And this prospect could raise fears of a slowdown in growth. But the dynamics of oil prices show that markets believe the economy is able to maintain a good pace of development, despite the tightening of monetary policy by the Fed. At least in the near future.
As for the supply of oil, it shows signs of weakness. At a meeting on February 2, the oil exporting countries decided to continue increasing production by 400,000 barrels per day, the growth rate is unlikely to be sufficient to meet demand.
It seems that the factors that determine the imbalance between supply and demand will not disappear in the short term. A potentially looming war between Russia and Ukraine could even exacerbate this imbalance by hampering Russian production.
The line chart below shows how the 2020 crude oil (CL) futures contract crossed a downtrend line that kept it in a downtrend. This contract is now moving inside the bullish channel represented by our two parallel lines. The MACD histogram reached a new high, while the futures price did the same. This convergence between the price and the oscillator shows the strength of the uptrend in this market. We can see that the highs made in early February ($92.31) will be retested in the near future.
On the daily chart below, the price of the same futures contract is also in an uptrend. Prices have not fallen below their 13-day exponential moving average since the end of last year. This is a sign that in this market, investors are rushing to the slightest drop in price in order to make a bargain.
The March crude oil (CLH2022) futures rally is approaching the symbolic $100 mark. The December futures contract shows in the options chain (see below) that the 100th strike call has a delta of 0.32. In other words, options market participants believe that the CL contract has a 32 percent chance of being worth $100 or more by the end of the year. For other crudes, the Energy Information Agency (EIA) forecasts an average Brent crude price of $74.95 per barrel in 2022 and a WTI price of $71.32 per barrel on average.
How to invest in oil
There are several ways to invest in oil. We will briefly touch on some of them below.
The most affordable future for investors is Light Sweet Crude Oil (CL) through NYMEX. Real-time pricing data for this contract is available through LYNX with a subscription to the US Value Bundle. Course data is free as long as you pay $30 (or equivalent) in transaction fees per month. Otherwise, this subscription will cost you $10. Oil futures have a multiplier of 1000, which means that one futures represents 1000 barrels of oil.
Each swing point in the price of oil is thus a value of $1,000, and the tick size is 0.01. So the nominal change is $10. Please note that physical delivery is not possible with LYNX. This futures contract cannot expire if you choose to trade it on the TWS trading platform.
In order to take advantage of oil prices in the medium to long term, it is important to understand the concepts of "contango" and "lag", as they have a significant impact on your profits if you enter long-term positions. Read more about this in the article Contango and backwardation
Options and Turbo
Options and turbochargers are other derivative products that allow you to predict and profit from oil price fluctuations. These products are of course available on the TWS trading platform. Trading these products involves high leverage, so caution is advised.
Investing in oil through ETFs
A protected investor can use trackers to profit from oil prices or stocks active in the sector. Examples of ETFs:
ETFs that follow the price of oil:
- United States Oil Fund (USO)
- VelocityShares 3x Long ETN for Crude Oil
- ProShares Ultra Bloomberg Crude Oil
ETFs investing in oil stocks:
- SPDR Fund for the Energy Sector
- Vanguard Energy ETF
- ETF SPDR S&P Oil & Gas Exploration & Production
Investing in shares of oil companies
Of course, you can invest in oil stocks. Individual stocks tend to be more volatile than indices or ETFs. Thus, your risk will be higher, but so will the potential profit. Some examples of actions of oil companies:
- China Petroleum and Chemical Corporation (Sinopec)
- Royal Dutch Shell Corporation