|March 24 16 Oil Note-|
We are issuing an unfair high warning as our price ceiling of 36.50-40 from prior Oil Note (March 6th) has been achieved. Further appreciation in WTI is not sustainable in current domestic and foreign fundamentals. The recent advancement was built on speculation as OPEC/Non-OPEC members failed to deliver. Such speculation caused a forced short squeeze unwinding shorts in a 40-session +60% move. Higher prices are attracting higher output, re-hedging, strengthening balance sheets, and disposing of inert inventories. This is a self-defeating process of rebalancing the market, as the next market clear will be more abrupt to phase out the excess.
WTI fundamentals are bleak on an intermediate basis. We expect the market to clear in 2Q16. The clear will stem from storage issues at Cushing PADD2, which is exceeding operational capacity. There is ample evidence of capacity bottlenecks due to storage requests denied, and rerouting inventories to PADD 1/3/4 (Genscape).
Paul Horsnell, global head of commodities research at Standard Chartered . “People are worried about a short-term issue, particularly in the U.S., particularly at Cushing.” As we’ve progressed from Feb to March nothing of significance has materially developed to skew domestic or forgeign supply and or demand. Actually the picture is deteriorating, and it’s only a matter of time before forced delivers will re-enter the market like Phillips 66 Feb debacle.
WTI Price action continues to be confused as a drop in production has offset massive builds. 9.36m barrels was logged in the build this week, the 2nd highest of FY’16. In addition, Cushing’s development of a draw is great news, but inventories are only being shifted to other PADDs.
Back in Jan’16, Moody’s put a half trillion dollars in energy debt on downgrade review. In Feb, default rates rose to 3.3% surpassing the Lehman crisis primary due to energy. In March Fitch raises US HY default rate forecast to 6%; Energy to 20%. The current deleveraging phase is a given due to a tightening cycle of the US Economy, which started in December 2015. Money base of the US Economy is not increasing, as the FED has no intentions on expanding the money base in the intermediate timeframe. We expect equities to revert to the 1700-1750 region in conjunction with WTI to the low 30s. Possible near term triggers for a WTI Clear stem from USD appreciation, equity devaluation, GDP data, WTI fundamentals, and HY debt. US Equities are forecasted to report a decline in 1Q16, which will be the 4th consecutive quarter of declines since 2008. Global growth is deteriorating as the IMF, OECD, and BIS have issued warnings in the past 30 days. Shortage of USD across the world, as well as most of the world’s central banks are easing should appreciate the USD. In return, EM decline, commodities decline, and a further devaluation by the PBOC of CNY will add headwinds for global economies.
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