Sunday March 6, 16 Oil Note-
We congratulate OPEC and Russia for truly confusing the WTI market. An advancement of +40% in less than a month on no concrete fundamental developments to the marketplace is remarkable. We believe the short cover was forced by US Banks in the ETF market to advance WTI price to a suitable level for oil companies to complete a massive round of secondary offerings. The size of the round has been the largest equity flow since 1999. This comes at a time where the US Default Rate has surpassed the infamous Lehman Crisis. Banks are avoiding another crisis via this pre- emptive measure, as the banking complex visualizes major headwinds lurk ahead.
The 2 immediate risks of WTI are Cushing Storage and Refineries. Cushing is >80% capacity with just 4-5 months of inventory build left according to GenScape. US Refineries have had a massive widespread cut of gasoline and distillates, which is the most since the great financial crisis, due to storage woes, lackluster demand, and a sluggish winter. On top of the cut, refineries have another 7 weeks of maintenance, which will add additional builds. We saw drastic measures in Feb, by Phillips 66 dumping their Cushing inventory for immediate delivery, which widened the WTI spot of Feb by over $2+ sending WTI spiraling to 26. Forced deliveries are another concern, and Feb events should be a reminder the storm has not passed.
We believe the forced short covering will have a celling of 36.50-40 range. Fundamentals will realign and the narrative of storage woes will be a crude awakening. As banks shore up oil companies via secondary offerings, we can only speculate this is a defensive play for the potential of more WTI downside to come. We believe the clearing process of excess capacity has not occurred yet, and is needed to rebalance the WTI Market. Once this occurs, the rebalancing effort will be under way, and we’ll state a heavy weigh for long positions in WTI. Our targets to the downside are first 30.63, which is a major point of control of the FY’16 balance value area. Next Price may re-visit 26 for a double bottom, and at an extreme clear into the 22.50 -20 range producing a hammer. As the Federal Reserve continues ZLB, the traditional V shape recover is nonexistent.
We end the note in a cautious tone of severe bottlenecks in the WTI patch. The 40% advancement in WTI is/was artificial in nature produced by a short covering to temporary bail out ailing oil companies via equity. The advancement in the WTI price was on no fundamental developments in curing the oversupplied and lackluster demand market, but merely to protect banks from an inevitable crisis. As the Short Cover is unsustainable in terms of slope, we are expecting an unfair high in the 36.50-40 range to produce a reversion back to the point of control of 30.63. The market is positioning for a clear of excess capacity, as banks shore up the viable oil companies. We feel confident in our analysis of an unfair high will be produced in the near term due to the drastic measures banks have undertook, which signals danger ahead.