Author Archives: Saandhy Ganeriwala

About Saandhy Ganeriwala

Saandhy is a postgraduate in Economics, but like all good market-men, he seeks confirmation from technical analysis charts for his macroeconomic ideas. His research is a good mix of charts, stats and econ. Apart from that, he calls himself a news junkie and an occasional writer.

Brent Crude Quarterly Projections till Dec18

Study on Crude – Jan’18

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20-Jan-18: Brent 68.61

EXECUTIVE SUMMARY

Crude Oil looks set for a phase of correction after the recent rally, post which there will be medium term bullishness. Our prediction for a corrective phase is supported by short-term technical charts where resistances for both Brent and WTI have been tested recently, and also by WTI derivatives’ positioning reflecting overbought conditions. However, with global demand-supply balance likely to rise to 1.5-2.0 million barrels per day (from 0.92 million barrels per day in Oct-Dec’17), we can expect Brent to touch 77 by Dec’18.

Quarterly Projections

Brent Crude Quarterly projections till Dec18

DIP TOWARDS 66-63

Brent Crude Weekly candlesBrent has already started dipping, supported by a rise in US weekly crude production. We project this correction to continue, with the range being restricted to 62.5-69.0 till June’18. Post that, Brent could resume its upmove, seeing highs near 73 in the July-Sep’18 quarter and continuing the momentum in the Oct-Dec’18 quarter to touch 77. There is long term resistance on the quarterly candles near 80, which shouldn’t be tested/breached. The likelihood of surging US production (led by Shale) balancing OPEC cuts keeps the upside restricted below 80.

 

BACKWARDATION SETTING IN

Brent Spot Price and 5 month spreadBackwardation has set in for both Brent & WTI (detailed illustration of the phenomenon in Page 3). Since Sep’17, the spread between 1 month Futures & 6 month Futures for Brent has turned positive, reflecting undersupply in the market. As seen in the adjacent graph, this spread is highly correlated with Brent spot. In the past, all crashes and rallies have been preceded by this spread changing trend towards the –ve (crashes) or +ve (rallies). The spread could move up to 4 by the year end, taking Brent to 77.

 

Nymex WTI Weekly and Quarterly projections

 

DIP TOWARDS 60-57

Like Brent, WTI tested resistance on weekly line charts by reaching a high of 64.88 on 15th Jan’18 but has been dipping thereafter. We see the dip extending till next quarter and a resumption of bullishness in the Jul-Sep’18 qtr (projected highs of 67). The year could end with WTI touching 70-70.5 as Brent tests 77. 

 

Corelation between WTI price and NymexOVERBOUGHT DERIVATIVES

Historically, positive correlation has been seen between sentiments of money managers in the trade of WTI derivatives, and the actual WTI price. We use the ratio between long and short positions as a proxy to indicate the prevailing sentiments among hedge funds regarding WTI prices. Levels prevailing currently (16.7) haven’t been seen in the last 3 and half years, compelling us to be wary of a dip in sentiments, and hence a dip in the ratio. We expect a drop to 11 by next quarter, taking WTI to lows near 57 in the Apr-Jun’18 quarter.

 

DEMAND-SUPPLY BALANCE TO RISE FURTHER

Global Demand Supply and WTI price differenceA positive directional correlation is seen between Demand-Supply balance and WTI price change in the next quarter. With OPEC countries broadly adhering to the 1.2 mb/day (million barrels per day) supply cut and global demand slated to increase by 1.53 mb/day (OPEC’s forecast), even a dramatic rise in US shale production (say, by 1 mb/day) is unlikely to shift the balance in the negative or near 0 any time soon. By Sep’18, we see this balance at 1.5 mb/day (from 0.92 mb/day in Oct-Dec’17), thereby taking WTI towards 67.

 

BACKWARDATION SETTING IN FOR BRENT & WTI

Backwardation setting in for Brent and WTI

We see here a depiction of backwardation in Brent & WTI futures. The 1 month – 6 month futures spread for both have turned from negative to positive (from Sep’17 for Brent and from Dec’17 for WTI). This might indicate the beginning of a long term bullish phase for crude oil in 2018.

 

Backwardation setting in for Brent and WTI

 

THINGS TO LOOK OUT FOR

  • Increases in US Shale Production and adherence by OPEC + Russia to supply cuts
  • Ratio of Money Managers’ Long to Short Positions in WTI Futures on NYMEX
  • Spread between Price of 1 month Futures and 6 month Futures for Brent and WTI

 

CONCLUSION

2018 is expected to be bullish on the whole for Crude Oil. The recent rally will be followed by a phase of short term corrections for both Brent (66-63 by Mar’18) and WTI (57 by Apr’18), post which, surging global demand would take both to highs near 77 (Brent) and 70.5 (WTI) by Dec’18.

Kshitij Reliability Chart Feb18

How much of the market movement do our forecasts capture?

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Kshitij Reliability Chart Feb18

How much can you rely on our Dollar-Rupee forecasts? One way we answer that question is by measuring and tracking our Reliability over time. Incidentally, we are the only forecasters to publish an 11-year reliability track on its website.

Another way to assess that is to ask, “If Dollar-Rupee moves “x” Rupees in one year, how much out of that “x” is captured by our forecasts?”

The blue line charts how many Rupees USDINR has moved over the previous 12 months. The value corresponding to Mar-09 is 10.91. This means that USDINR moved up by Rupees 10.91 between Mar ’08 (40.35) and Mar-09 (51.26). As against this, the green line says that we were able to predict Rupees 5.55 of the upmove.  In other words, our forecasts were successful in capturing Rupees 5.55 (51%) out of the actual movement of Rupees 10.91.

How does that work? After Mar-08 (when USDINR was 40.35) and till Mar-09 (when USDINR was 51.26), we made 12 forecasts for the price which was expected to prevail in Mar-09. The average of these 12 forecasts was 45.90, compared to the actual 51.26 that prevailed in Mar-09. Thus, we predicted a movement of Rupees 5.55 (45.90 – 40.35) in USDINR over this 12 month period, as compared to the actual movement of Rupees 10.91 (51.26 – 40.35). This captured movement of Rupees 5.55 is shown by the green line on the graph.

We didn’t meet our own expectations from Dec’11 to Feb’14 when the median gap between blue and green was approximately 3.21 points (median proportion of actual movement captured in this period was 56%).

However, over the years we have tried to improve our forecasting capabilities and consequently, the results for the period Mar’14 to Dec’17 have shown a marked improvement – the median gap reduced to -0.19 points. In other words, median proportion of the actual Dollar-Rupee movement captured by our forecasts was 78%. It is our aim to increase the “captured” movement from the current 78% to at least 85% over time.

We ask very hard questions about our performance to ourselves, well before any of our Clients do. And we try and answer the question very objectively. This is a necessary first step to ongoing improvement and results in increased reliability of our forecasts for our Clients.

View our February Economic Calendar with the current chart.

Global Demand Supply and WTI price difference

Crude Oil Report – Feb’18

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22-Feb-18: Brent 65.25; WTI 61.34

RECAP

In line with the forecast in our Jan’18 report, a corrective dip in crude prices did take place (down to 61.76 in Brent and to 58.08 in WTI) after both saw highs of 71.28 and 66.65 respectively. Further, overbought conditions in WTI derivatives also receded as predicted (ratio of long to short positions by Money Managers falling from 14.58 to 13.42 currently).

 

EXECUTIVE SUMMARY

Although Brent (B) and WTI (W) have presently risen to 65.25 and 61.34 respectively after the corrective dip earlier, we see the upside in Jan-Mar restricted by 21-day moving averages for both – 66.8 (B) and 63.04 (W). A dip towards channel supports and longer term moving averages – 57-55 (B) and 53 (W) in Apr-Jun is forecasted, after which the market can rise till 77 (B) and 70.5 (W) in Oct-Dec’18, in line with our earlier forecast. An interesting pattern in US Crude inventory trends supports our above hypothesis. Further, we forecast the global Demand-Supply Balance (quarterly) for crude in 2018, which also makes us bearish on Crude in the 1st half and bullish in the 2nd half of the year.

Brent Crude Quarterly Projections Mar18

NEAR TERM DIP TO BE MORE PRONOUNCED

Our forecasts for the next four quarters is given in the above quarterly candle chart. The downside in the 2nd quarter is revised to 57 (outside chance of 55) from 62.50 earlier based on technical charts (see below) and the startling surge in US crude production (already at 10.27 million bpd – surpassing Saudi Arabia). The near term dip should be backed by a dip in refinery demand in USA and the Middle East, due to maintenance closure of refineries. At the same time, the extension of the OPEC-Russia output cuts till 2018-end can lead to higher prices by end-2018.

BRENT CAN DIP TO 57-55

Brent dip to 57 in Apr-Jun

While below 66.80 (21 DMA) Brent can test strong Support at 57.57 (200 DMA) in Apr-June.

Further, 57.82 is the 50% retracement of the rise from 44.35 (Jun’17) to 71.28 (Jan’18). This coincides with 57.57 (200 DMA) mentioned above making it a strong Support.

A dip below 57.57 (less preferred) would test trendline support at 55.

 

WTI Quarterly Projections Mar18

 

WTI: DIP TO 53, THEN UP TO 63.00-70.50

WTI weekly candles Mar18

The 21 DMA on the upper left chart along with the trend line resistance should limit the current rally till 63. The adjacent chart further shows that both the 52 weeks MA and the channel trendline could provide support near 53 in Apr-Jun. That should be then followed by a bounce towards 63 in Jul-Sep and a further rise towards 70.5 in Oct-Dec. This is well in line with the outlook on Brent.

 

US CRUDE STOCKS & WTI PRICE

WTI price and US Crude Stocks

US Stocks and WTI Price fall together till June-Aug; WTI  rises thereafter

We see above the repeat of an interesting phenomenon in the Mar-Sep periods of the last 3 years. Contrary to normal logic, a fall in US stocks is seen to be accompanied by a fall in WTI prices till June-Aug. Without going into why this happens, if the pattern repeats this year, a slight fall in stocks might be accompanied by a dip in WTI towards 53 by June, to be followed by a rise going in to September.

Crude Opec

Global demand supply and wti priceDD-SS TO DIP AND THEN RISE

In the table above, we show the forecast for global dd-ss balance in different quarters of 2018, corresponding to 2 possibilities:

(1) OPEC production being maintained at 2017 levels (continuation of output cuts),

(2) OPEC production increasing by 0.5 mb/d in 2018 (if output cuts are not followed).

(Note that the expected rise in US crude production is already incorporated in the non-OPEC supply forecast in the 3rd row)

The above 2 possibilities for Demand-Supply trend are also shown in the blue dotted box in the above chart, as is the corresponding WTI forecast. We see that in both cases, the dd-ss balance is seen to be dropping below the 0 line in the next 2 quarters, followed by a rise beyond 1 mb/day. Given the correlation in WTI price and dd-ss balance, the above forecast is yet another reason for our near term bearishness and long term bullishness on crude.

 

THINGS TO LOOK OUT FOR:

  • Closing of Refineries for Maintenance in Saudi Arabia (Yanbu Refinery), Middle East, USA etc in Mar-June leading to a fall in Crude demand
  • Rise of US Crude Production beyond the current 10.27 mb per day towards EIA’s estimate of 11 mb per day by 2018-end
  • Backwardation trend in Crude Futures: Spread between Price of 1 month Futures and 6 month Futures – currently at 1.86 (WTI) & 1.54 (Brent) – a dip below these levels towards 0 could imply some bearishness ahead

 

CONCLUSION

The upside in Jan-Mar should be restricted by 21 days moving averages – 66.8 (B) and 63.04 (W). A dip towards channel supports and longer term moving averages – 57-55 (B) and 53 (W) is forecast in Apr-Jun (also on back of forecasts indicating lower global demand-supply balance during the period). Post July, we retain our earlier forecast of a gradual rise till 77 (B) and 70.5 (W) in Oct-Dec’18.

Dollar Rupee Forecasts Actual Consensus and Kshitij forecasts

How do our forecasts compare with those of our peers?

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Dollar Rupee Forecasts Actual Consensus and Kshitij forecasts

Anyone wanting to evaluate our service would ask the above question. As an answer, we compare our forecasts with the results of the RBI’s bimonthly Survey of Professional Forecasters (SPF), which captures the market’s consensus expectation for USDINR for forthcoming quarters.

Example of Computation

As an example, for the USDINR rate at end of Dec ‘17, there were 6 forecasts which the   RBI’s survey pool of professional forecasters made. These are displayed in the 1st column of the adjacent table. The mean of these 6 forecasts ie 66.34 can be regarded as the market’s consensus forecast for USDINR for 31ST Dec, 2017. Correspondingly, over the preceding year, we had made 12 Kshitij monthly forecasts for the USDINR rate expected to prevail on 31ST Dec, 2017 (see column 4). The mean of these 12 Kshitij forecasts ie 64.55 ultimately turned out to be closer to the actual spot rate (63.88) of USDINR on 31ST Dec, 2017.

Average Absolute Deviation from Actual Spot

In fact, over the period Apr-2015 till Dec-2017, the average absolute deviation of Kshitij forecasts from the actual quarter end spots has been Re 0.99 per USD, much narrower than the deviation of the RBI SPF’s forecasts of  Rs 1.68 per USD.

We might be the first and only forecasting service to carry out such an analysis, comparing ourselves with our peers, as a means to judge how much value we can add compared to others. This is part of our effort to increase our Reliability. Please also read:
How much of the market movement do our forecasts capture
Stop Press! Or, why KSHITIJ.COM is Reliable

View our March Economic Calendar.

Euro Long term Forecast – Feb’18

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1-Mar-18: Euro 1.218

RECAP

In our Jan’18 report, (http://colourofmoney.kshitij.com/euro-long-term-forecast-jan18/) we had expected resistance near 1.235 to hold in Jan, to be followed by a dip towards 1.20-1.19 in Feb. However the Euro saw a high of 1.2556 in Feb-mid, post which a correction (towards 1.215) is presently underway. For the medium term, we had presented two possibilities – a straight rise past 1.25 towards 1.30 after April (which was more preferred), or a corrective fall towards 1.17 (which was less preferred).

 

EXECUTIVE SUMMARY

Immediate Support at 1.2200-2150 can produce a bounce to 1.255-1.26 in early Mar’18. While we retain our preference for a straight rise past 1.26, as a matter of ample caution, this report examines the chances of the less preferred alternative of a correction towards 1.18-1.16 coming true. Supporting factors for this correction are: a possible bounce in the Gold-Crude ratio triggering a bounce in the Dollar Index and a possible reduction in the record Net Long Euro positions among traders/speculators resulting in near-term Euro bearishness.

Monthly Gold Crude Ratio vs Dollar Index Feb18

Whenever Gold weakens vis-à-vis WTI Crude (Gold/WTI Crude ratio falls), the Dollar Index weakens and vice-versa, as the market presumably tries to maintain a parity between the Dollar and the “real” value of Crude. If WTI Crude (61.42) dips to $53 in Apr-June and if Gold (1312) remains below $1370, the Gold/Crude Ratio (21.36) could bounce towards 25, especially since, it has a Support near 20 on the 89-month moving average. If so, the Dollar Index (90.76) could bounce towards 94-95, implying a fall to 1.18-16 on the Euro.

 

EURUSD Weekly Chart Feb18CORRECTION AFTER 5th WAVE? OR NOT?

The weekly chart alongside shows a 5-wave upmove (from 1.035 in Jan-2017) which might end soon near 1.26 in Mar’18. If this wave count turns out to be correct, then a correction towards 1.18 is likely in Apr-June, supporting the “less preferred” scenario.

If, however, the wave count is incorrect, and the fractal study of Jan ’18 remains in force, the Euro may see a straight rise past 1.26.

 

Overbought Derivatives to lead to a dip in Euro

A major reason why the Jan ’18 fractal study favouring a straight rise past 1.26
(http://colourofmoney.kshitij.com/euro-long-term-forecast-jan18/) might not work out is that, the speculative Long positions in the Euro are at a record high currently, unlike the situation in 2003, when the speculative Long positions were much more moderate. As such, the market might not have enough firepower to break above 1.26. In case the Euro Long positions are wound down to more reasonable levels, the Euro could dip towards 1.18-17, given the strong correlation between the Euro and the net long – short positions on CFTC.

 

JAN’18 ECB MEETING CUES: CONCERNS ON MUTED INFLATION & EURO STRENGTH

Close analysis of the press conference by Governor Draghi after the Jan’18 ECB meeting and the Minutes of the meeting reveal that the ECB was highly unimpressed by the attempt made by US officials to weaken the Dollar – their concern being that a strong Euro might suppress the ongoing rise in inflation. This rise in inflation (towards a target of just below 2% from the current 1.3%) is the bedrock of the ECB’s plan to reduce its monetary stimulus post Sep’18. Moreover, the drop in EU inflation from 1.54% in Nov’17 to 1.3% in Jan’18 could also be slightly discouraging for the ECB. The fact that the Governing Council did not even drop the ‘easing bias’ from their statement (‘easing bias’ is a commitment to unexpectedly increase monetary stimulus, if absolutely required) and is unlikely to do so in the 8th March meeting either, is a significant pointer to the fact that the ECB is uncomfortable with the Euro’s recent strength. Given this background, it will be interesting to see if the ECB tries to talk down the Euro in the 8th March meeting.

 

CONCLUSIONEURUSD Projection Table

While we retain our “more preferred” view of a straight rise past 1.26 towards 1.30, we are alive to the possibility of the “less preferred” scenario of a fall to 1.18-16. The “Stop Loss” levels to  watch are: a break below 1.21 on the Euro and/or a rise past 23 on the Gold/Crude ratio and 91.5-92.0 on the Dollar Index. The trigger might be the ECB statements on the Euro in its forthcoming 8th March meeting next week.