Oil Price Prediction Update (Jul 27, 2020)

Update Summary (Jul. 27, 2020)

• Target ICE Brent (Sep): 42.0 $/B
• Opening price: 43.4 $/B
• Disparity: 3.3%
• Trading direction: SELL

Methodology

1. We quantify the current surplus of crude oil available on the ocean by calculating the draft-adjusted DWT (deadweight tonnage) of all oil tankers at different distances away from their destinations by nautical miles.

* Draft (or draught): the vertical distance between the waterline and the bottom of the hull of a vessel. This indicator shows how deep the vessel is immersed in the water. Consequently, we can estimate how much oil each vessel is carrying. 

2. We tested the correlation between the amount of surplus crude oil and crude oil price. We hypothesized that these two variables should have a strong negative correlation. In the chart below, we multiplied -100 to the actual correlations for visual convenience. Indeed, the result shows a strong correlation, which reaches the peak level at about 650 nautical miles.

We can conclude the world is well supplied with oil if there is abundant crude oil approaching to its destinations from more than 650 nautical miles away.

If the amount of oil approaching from that distance significantly decrease, the market tightens and the oil price is likely to rise, and vice versa. We believe the regression equation should become more a power law function when more data accumulate in the future.

3. Then, we calculate the target oil price by using the regression equation above and determine if there are any trading opportunities by calculating disparities between the target and actual price. ICE Brent price consistently moves within a certain boundary around our targets. Hence, we were able to flexibly adjust the entry points in both directions.

4. We have been actually trading ICE Brent futures at difference disparities and are resulting in the following performance profile assuming no leverage.

* contact: tamuzin2020@gmail.com