Oil Bulls’ Hope For Quick Price Dip And Reversal Dimmed

Oil Bulls’ Hope For Quick Price Dip And Reversal Dimmed

$XOM, $BP, $RDS-A, $ICE, $USO, $OIL

World Crude Oil prices have continued their deep dive as the market is glutted with extra supply from the OEPC, US shale producers, and soon from Iran

As Crude Oil prices entered a 2nd deep dive a few weeks ago, Bullish traders and analysts had hoped for a repeat of the sharp but short dip that occurred early in the year, that being a speculative slide below 50 bbl followed by a quick recovery.

Some are reconsidering that scenario, as long-term Crude Oil prices take the lead in the market’s latest dive, pushing sentiment toward a longer decline that would mean prolonged pain for big producers, from Exxon Mobil Corp (NYSE:XOM) to Saudi Arabia.

Immediate delivery benchmark global Brent Crude Oil futures at 50 bbl are about 4.00 higher than they were at their lowest point in January,

Prices for Brent Crude delivery in Dec 2020 are nearly 8.00 lower than at the beginning of this year. A year ago the contract hung around 100 bbl.

The reason for the deterioration of the forward curve and decline in “long-dated” futures is a subject of debate.

But even some who disagree with the fundamental logic of lower long-dated prices are coming round to the scenario that prices will be lower for a lot longer.

Some analysts believe the recent selloff was fueled by speculators fleeing the market on the collapsing confidence after China’s stock market crash, and exacerbated by a lack of liquidity and resumption of hedging by producers including Mexico, which sell futures to guard against lower prices.

Others say it stems from more deeply rooted fundamental factors such as expectations of rising exports from Iran next year following a landmark nuclear accord, and if so, far forward prices may be flashing warning lights for the future.

The retreat in long-term Crude Oil prices began in the latter part of last year, when Saudi Arabia made clear it would no longer cut production in order to tighten up the markets.

Without the Kingdom’s promise to defend prices, the value of Brent Crude Oil for 5 years in the future dove from about 90 in late November to around 72 bbl 2 months later.

Over the past month it dove again reaching nearly 66 bbl last Tuesday, its lowest since Y 2009.

Last week, Key analysts cut their Y 2016 oil price forecasts by 10 bbl on a mix of factors including falling production costs, disappointing demand, a stronger Buck, and deteriorating market sentiment.

The question for Oil industry executives, traders and analysts is whether this represents a new equilibrium for the market: a price high enough to encourage just enough new production in the future to meet demand, which continues to grow.

Some big Oil companies such as BP Plc (NYSE:BP) and Royal Dutch Shell Plc (NYSE:RDS-A) are preparing investors for a more extended downturn, as some are still signalling cautious optimism.

WTI Crude Oil (NYMEX) USD/bbl. 44.96 +1.09 +2.48% SEP 15 17:15:00

Brent Crude (ICE) USD/bbl. 50.12 +1.51 +3.11% SEP 15 17:30:59

Stay tuned…

HeffX-LTN

Paul Ebeling

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