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Fundamental Forecast for : Neutral

FUNDAMENTAL CRUDE OIL PRICE TALKING POINTS:

  • The ONE Thing: Three makes a trend as Crude oil has pushed aggressively lower and the premium that had supported the market on near-term futures contracts continues to move toward zero.
  • The correlation to WTI and stocks are coming at a bad time as stocks show their worst performance with a month-to-date loss of 7%. The S&P is having its worst month since February 2009, and the NASDAQ is working on its worst monthly decline since November 2008.
  • Crude curves got crushed this week showing demand premiums on front-month contracts are near the point of inversion, which makes the bulls game a tough one to win.
  • Per BHI, U.S. total rig count rose one rig to 1068 from 1067; US Oil rigs up two rigs to 875
  • The technical picture: WTI uptrend holds at $66/bbl, and a weekly close below has heightened the risks that a reversal may be neigh or in the works. The monthly chart is showing momentum may be turning, which could set up a sharp move lower in coming months if demand doesn’t pick up fast.

    • “Buy when it’s cheap. If not then, when?” is a famous line from value investor James Montier. Of course, whether or not something is cheap is only obvious in the future or with the benefit of hindsight. What’s cheap can always get cheaper.

    While this logic does not necessarily apply to crude, which is lower by 9% on the month, an experienced trader knows that you can lose 50% (please use stop losses, so this doesn’t occur,) on an investment that’s already lost 90% of its value. How? If something has fallen from $100 to $10, you buy it, and that asset drops to $5, you’ve lost 50%.

    The question, of course is, where we are on crude oil? Things seemed positive just weeks ago. Crude was trading at a four year high, but just like the positive tech books have had a rude awakening this week, so to have those hopeful bulls of the energy complex. The Nasdaq 100 is down (as of writing) 11.9% on the month with Friday’s losses led by Amazon. The SPX500 as of Friday, fell 10% from the all-time high with the move this week.

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