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Crude Oil: Flip A Coin

Seeking Alpha

by: Viking Analytics


With confirmed break above $49/bbl (“heads”), crude will likely resume its uptrend.

With confirmed break below $47/bbl (“tails”), crude will likely begin a new downtrend.

In the short run, supply and demand is a mere headline and has little effect on price direction.


Last week, we outlined a bearish case for crude oil and the United States Oil Fund (NYSEARCA:USO). After a surprisingly bullish EIA report on Wednesday following only a mildly bullish API report on Tuesday evening, we have updated our near-term outlook to a coin flip. After the EIA report, we covered our short position and went long at $47/bbl and selling yesterday when the market appeared to be drifting back below $48/bbl.

We have shifted back to a long bias, based upon a belief that OPEC and other market makers have a vested interested in keeping the oil price higher, not only for the Saudi Aramco IPO scheduled for 2018, but also for the financial health of oil exporting countries worldwide. We have covered these issues in prior articles.

On the other hand, the market has been oversupplied with oil for more than two years. While there have been glimmers of hope for supply-demand re-balancing, oil supplies in the U.S. remain at all-time monthly highs. If the price of oil was in the $20s at lower inventory levels, who is to say that it cannot return there?

The USO ETF closely follows the front-month WTI crude oil futures contract on NYMEX, since it holds the front-month futures contracts as its primary asset. USO can be useful for short-term trading positions, but is not always a great candidate for “buy and hold” investors, due to time decay created by the normal structure of the futures market. We covered that briefly in an article that can be accessed here. We have updated our indicators for USO investment, and the above table summarizes our current outlook.

Bullish Citi analysts call for crude oil to hit $70 by year end but elsewhere skepticism grows


Citi analysts predict crude oil will hit $70 by the end of 2017   

Crude oil prices could shoot up to $70 a barrel by the end of 2017 as supply and demand levels continue to rebalance in coming months, according to analysts at Citi.

Nearer-term, the research team has raised price estimates modestly by $5 to an average $55 per barrel for the first quarter and by $2 to an average $56 per barrel for the second quarter.

Yet investors will likely have to wait a few more months for a more sustained rise, says Citi in the note published Tuesday, as Brent traded up marginally to around $56 in early European trade.

“Oil prices are not likely to stray far from their current $53-58 per barrel range in the near term as record investor net length and bearish inventory data will likely cap prices until more tangible evidence of a tighter market emerges,” write the analysts.

Citi’s research team is looking to the second quarter for positive effects from both the reported 93 percent compliance level of OPEC participants in last November’s production cut agreement as well as substantial refinery maintenance in Asia scheduled for the spring.

However, a close eye must be kept on delivery timetables, David Ernsberger, Global Head of Energy at S&P Global Platts, told CNBC’s Squawk Box on Tuesday.

“There is the shadow looming of new supply coming to market not just from Iran but also from the U.S. and what we’re looking at heading into the second quarter is when will that oil come to market and will it begin to take the edge off prices a little bit,” he noted.

Looking beyond 2017, Citi’s optimism also fades on expectations that increasing numbers of shale producers will be enticed back into the market by more favorable pricing.

However, the impact of shale is hard to accurately predict given the lack of uniformity in the product says S&P Global Platt’s Ernsberger.

“One cargo of shale oil is not like another and you don’t really know what is going to happen when you put it through your refinery until it lands at your port and that’s a little more uncertainty that even the oil refinery industry – which is used to uncertainty – is really willing to embrace right now,” Ernsberger explained.

“So there’s a stability of new supply issue that really needs to get worked out in the next few years,” he added, saying this was the “big story” regarding shale right now.

US shale oil to rise massively in months: Commerzbank

US shale oil to rise massively in months: Commerzbank   

Another prominent concern in the market is the distribution of derivative positioning with record net long positions and a current long to short positioning ratio of around 10:1, with this being a key reason why oil will soon drop to below $50 per barrel, Eugen Weinberg, Head of Commodity Research at Commerzbank, told CNBC’s Street Signs on Tuesday.

Weinberg also argued that the focus on OPEC compliance levels were like a distracting “magician’s show” while the real action is taking place in the U.S., which he claims is on the way to regaining its crown as the world’s largest oil producer.

“OPEC must at some point recognize and understand that they are no more the marginal producers and marginal production will be coming from shale oil so prices will come under massive pressure during this year once investors recognize oil supplies are not going to disappear,” he opined.

“The world is awash with oil at the moment and there continues to be endless supply so therefore I don’t see a real reason for prices to rise above $60 or $70…so I’m really seeing probably the risks of the prices falling below $50 for a considerable period of time and probably even touching the levels of $40 to $45 this year,” he concluded.

US Crude Oil Up 29 cents


US crude settles at $53.83, up 29 cents, after US Treasury imposes sanctions on Iran

Oil prices gave up much of their gains after jumping on Friday as the United States imposed sanctions on some Iranian individuals and entities, days after the White House put Tehran “on notice” over a ballistic missile test.

Front month U.S. West Texas Intermediate crude futures settled 29 cents higher at $53.83 a barrel. For the week, the contract was up about 1 percent.

Brent crude futures were up 24 cents at $56.80 a barrel by 2:34 p.m. ET (1934 GMT). Brent was on track to gain about 2 percent on the week, its first significant weekly rise this year.

Volume in U.S. crude futures was relatively low on Friday, with about 335,000 contracts changing hands by 12:15 p.m., on track to fall short of the 200-day moving average for 528,000 contracts.

This is the first move by the administration of President Donald Trump against Iran. It follows his vows during the 2016 campaign to get tough on Tehran.

Shuaiba oil refinery south of Kuwait City, Kuwait.

Iran relationship a black swan for oil?   

Under the sanctions, announced by the U.S. Treasury, 13 individuals and 12 entities cannot access the U.S. financial system or deal with U.S. companies.

A senior U.S. administration said Friday’s sanctions were an “initial step” in response to Iran’s “provocative behavior,” suggesting more could follow if Tehran does not curb its ballistic missile program and continues support for Houthi militia in Yemen.

The news added to volatility in what had already been a day of choppy trading. Analysts said the market is torn between promised cuts from the Organization of the Petroleum Exporting Countries and fears over rising U.S. shale oil production.

“While the market is taking these actions in stride so far as unlikely to result in a larger military conflict that would put Persian Gulf crude oil supplies at risk, the odds of that scenario are certainly higher than a week ago,” wrote Timothy Evans, energy analyst at Citi Futures in New York.

Trump had warned on Twitter that “Iran is playing with fire” after its missile test.

“The ‘trumperament’ of the new U.S. president is being tested by Iran and soon maybe also by Russia and China,” said Olivier Jakob, managing director of consultancy PetroMatrix. “And that is adding some geopolitical support to crude oil.”

Here's how to play a rally in crude

Here’s how to play a rally in crude   

Comments by Russian energy minister Alexander Novak that oil producers had cut their output as agreed under a deal with OPEC, also helped to support prices, analysts said.

Novak said that Russian companies might cut oil production more quickly than required by its deal with late last year. He said that 1.4 million barrels per day (bpd) was cut from global oil output last month as part of the deal.

Oilfield services firm Baker Hughes reported U.S. drillers added 17 oil rigs in the last week. The count has been recovering since June and now stands at 583 rigs, compared with 467 rigs last year.

Analysts said oil’s advance could run out of steam quickly. PVM Oil Associates noted the market “is sandwiched between supportive OPEC-led output cuts and the bearish impact of a resurgence in U.S. crude production.”

The prospect of more oil output from Nigeria and also from other non-OPEC producers such as Brazil also looms.

“Record speculative length threatens to trigger a sharp price fall as unease builds amid the ongoing wait for a conclusive upside breakout,” Commerzbank said in a note.

— CNBC’s Tom DiChristopher contributed to this report.

US crude settles at more than one-month high of $47.83 on OPEC deal optimism

Martin Divisek | Bloomberg | Getty Images

Oil prices settled at a more than one-month high on Thursday as optimism over an OPEC plan to limit output was offset by questions over its ability to rebalance a heavily over-supplied market.

The Organization of the Petroleum Exporting Countries agreed on Wednesday to cut output to 32.5 to 33 million barrels per day (bpd) from around 33.5 million bpd, estimated by Reuters to be the output level in August.

OPEC said other details of the plan will be known at its policy meeting in November, leaving unanswered when the agreement will come into effect, what new quotas for member countries will be and for what periods, and how compliance will be verified.

Earlier in the day, oil was down, with crude futures retreating from their 6-percent gain on Wednesday, the biggest in a day since April. A steady dollar and weak U.S. stock market also limited some of the upside in oil in early trading.

Will the oil rally continue?

Will the oil rally continue?   

Global benchmark Brent crude oil was up 36 cents a barrel at $49.05 by 2:58 p.m. ET (1858 GMT). The contract earlier rose to $49.81, the highest intraday level since Sept. 8.

U.S. light crude oil settled up 78 cents, or 1.7 percent, at $47.83 a barrel, the highest close since Aug. 23.

Many analysts said there remained a lack of clarity over details, as well as a risk the deal could unravel. Moreover, if oil prices were to rise, it could also lead to a surge in non-OPEC output, they said.

“With such uncertainty around the minutiae, we expect uncommon volatility in the oil market until OPEC’s November meeting,” analysts at ING said.

An invitation to join the cuts could also be extended to non-OPEC countries such as Russia.

Russian Energy Minister Alexander Novak said on Thursday Russia is aiming to keep its oil production at near-record levels despite OPEC’s decision to modestly reduce its output.

He said Moscow was ready to consider proposals from OPEC for joint action on the oil market and would hold consultations with the group in October and November.

Again Capital Founding Partner John Kilduff said he did not see any fundamental reason for the rise in prices on Thursday. In his view, continued Russian production of 10.7 million barrels a day would not help to rebalance markets.

Pro: Bullish aspects of oil market more probable

Pro: Bullish aspects of oil market more probable   

U.S. bank Goldman Sachs said it expected the OPEC deal to add $7 to $10 to oil prices in the first half of next year.

“We think that OPEC is running a dangerous game if the aim is to push the crude oil price higher from here in the short term as it would just activate more U.S. shale oil production,” said Bjarne Schieldrop, chief commodity analyst at Nordic bank SEB.

And a cut in OPEC production might do little to reduce oversupply, given uncertainty about output from Iran, Libya and Nigeria.

“The problem of surpluses will not be solved if these countries take full advantage of their capacities,” Commerzbank chief commodities analyst Eugen Weinberg said.

— CNBC’s Tom DiChristopher contributed to this report.