Asset of the month: Crude numbers | 4th March 2015

Why oil prices may well be on the rise in March |  The Delta Economics asset price forecasting model is calling oil long this month reversing the extensive fall in oil prices. The Information Ratio, which measures the performance of our index each month against benchmark returns, is at 0.79 for March’s oil call. Any Information Ratio value above 0.5 suggests strong back-tested performance.

There are two reasons for being bullish about oil. First, March of any year usually sees a seasonal pick-up in trade following Chinese New Year. Trade and oil prices are highly correlated (0.94) and move in the same direction: if oil prices rise, then trade usually rises too. This usually reflects an increase in demand for that month (Figure 1).

 

2015-03-04_assetOfTheMonth_001_fig01

 

Figure 1  |  Monthly value of world trade (USDbn) versus WTI Oil, Last Price Monthly, June 2001-December 2015 (forecast)
Source  |  DeltaMetrics 2015, Bloomberg

 

Second, Saudi Arabia has increased crude oil prices for April’s sales to Asia. This is bound to put upward pressure on prices in March more generally. Not least because it hints that Asia’s economy may well be turning a corner. The correlation between Chinese trade and oil prices is very high at 0.89. Chinese trade similarly dips at the beginning of the year but Delta Economics sees a rapid pick-up during March with overall growth in Chinese trade for 2015 looking positive at over 7%.

 

2015-03-04_assetOfTheMonth_001_fig02

 

Figure 2  |  Monthly Value of Chinese trade (USDbn) versus WTI oil Last Price Monthly, June 2001-December 2015 (forecast)
Source  |  DeltaMetrics 2015, Bloomberg

 

The pick-up in demand at the end of Q1 is quite marked. The forecast for oil during 2015 is for a rise in oil prices alongside a modest increase in the rate at which world trade is growing – from 1.2% in 2014 to 1.9% in 2015. However, this does not herald a return during the year to values above $100 a barrel. The modest growth in trade we are forecasting for the year is substantially slower than the post-2008 oil price trough and, as this suggests that global demand remains slack, the crude numbers do not suggest rapid increases in oil prices during the year.

 

Asset of the month: Crude numbers  |  Author  |  Rebecca Harding  |  CEO