OIL

Fundamental Forecast for : Neutral

FUNDAMENTAL CRUDE OIL PRICE TALKING POINTS:

  • The ONE Thing: Multiple factors of institutional positions, falling front-month futures premium (chart below,) and building supply gluts have fundamentally shifted the outlook of the oil market toward 2018’s end.
  • A key factor of crude is seen in calendar spreads between December 2018- December 2019 futures contract flip from positive to negative, and the Contango environment looks to be a potential tipping point.
  • Crude sank rapidly this week on another US inventory build and reports of massive production boosts from OPEC that took output to the highest level since 2016 taking oil to a six month low.
  • Per BHI, U.S. total rig count fallsone rig to 1067 from 1068; US Oil rigs fell by one to 874
  • The technical picture: WTI broke through multiple support on the charts, and now calls for near-$50/bbl is coming into sharp view after we traded to $76 earlier last month.
  • Crude Oil Institutional Speculative Long Positioning to Keep Shrinking

    • WTI crude oil fell 13.26% over the last month while Brent fell 8.7% and NYMEX Gasoline, a refined oil product has fallen 15.8% while crude calendar spreads have fallen into contango where the front-month futures product trades at a discount to a latter month contract of the same commodity.

    BYE-BYE FRONT-MONTH PREMIUM

    CLZ8CLZ9-CL1 CHART

    Data source: Bloomberg

    If you went into the month of October bullish crude (I did,) you are likely now questioning what has happened in a little over 20 trading days that have taken the market from four-year highs to a near bear market (I am.) A bear market is defined as a 20% drop in a market, which would happen on a move below $61.45. Currently, crude has fallen as much as 18% from the YTD high on October 3.

    This week’s move in crude to six-month lows were backed by multiple negative shifts in narratives underlying the oil market. A key development that caused additionally selling later in the week was news that OPEC output jumped to the highest levels since 2016, which pushed the futures spreads of the December 2018 – December 2019 WTI contract to negative, which has wiped a lot of underlying buying pressure.

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