Oil Prices - August 18

[dan_s]

This is from Raymond James Energy Industry Brief dated August 15, 2016

The “paper” oil barrel market is much bigger than the “physical” oil barrel market. In fact, the average volume of WTI oil barrel contracts
(1 contract = 1,000 bbls) traded daily is over 100x the actual volume of crude barrels moving through the Cushing, OK oil hub at any
given time and over 5x GLOBAL supply!

Because of this, oil speculators can often temporarily overwhelm the longer-term supply/demand fundamentals, creating volatile short-term oil price swings.

Within the “paper” barrel market, the main participants are:
1) physical (or production/merchant) players, and
2) speculative traders (or money managers).
Additionally, there are “swap dealer” positions and “other” positions.

In theory, the physical players are using the oil futures market to hedge prices against
tangible production, while the speculators are trying to profit from trading moves (ie: month-to-month variations, or regional/gradequality
arbitrage opportunities). Typically, speculators can represent a quarter to a third of the market trading volume, but they can
have an outsized impact on prices swings. The simple mechanics of the market suggest that when the speculators increase (or buy)
“long” positions and/or decrease (or cover) “short” positions, short-term oil prices go up. Likewise, when speculators sell (or
decrease) “long” positions and/or increase “short” positions, short-term oil prices tend to move lower. The key here is that when oil
speculators accumulate larger than normal “long” or “short” positions, it often means that prices are at, or near, a turning point in
oil pricing. This is especially important for oil prices right now since the speculative crude oil short position last week eclipsed a
decade long high.

Over the past two years, there have been very clear short-term trading bottoms
realized whenever the speculative “short” position in WTI crude oil peaks.

Clearly, the large accumulation of a speculative “short” oil position over the past month helped drive oil prices lower in this recent
oil price pull-back. Importantly, the recent surge in speculative “short” positions to a whopping ~230,000+ contracts (as of August
9, 2016 per the CFTC Commitments of Traders) could eventually create a large upside opportunity for crude (and energy stocks) as
speculators exit (or cover) their short positions. While it may take weeks, or even months, for our bullish oil supply/demand thesis
to impact the short sellers, the short “covering” process often leads to sharp upward moves in prices.

The previous high speculative short position peaked in mid-February 2016 and triggered the near doubling in WTI oil prices
off of the February oil price bottom. It is also interesting to note that the current speculative “short” position is now the highest
seen in a decade and continues to climb (with a ~2% increase week-over-week).

Conclusion: We believe the bulk of the recent oil price pullback has been driven largely by technical trading patterns, not
necessarily deteriorating short-term oil fundamentals or a material disconnect from our long-term bullish thesis.

[dan_s]

The U.S. dollar moving lower is also helping push oil prices higher.

See: http://www.marketwatch.com/investing/index/dxy/charts

[setliff]

there is a beautifully formed inverse H&S on the weekly WTI continuous chart on stockcharts.com. sets a PT of 75.

http://stockcharts.com/h-sc/ui?s=$WTIC& ... &listNum=1

[dan_s]

Here is what the experts are saying:

July 14: RBC Capital Markets says WTI will average $59/bbl and HH natural gas will average $3.00/mcf in 2017

August 16: Merrill Lynch says WTI will ramp to $54/bbl by year-end and $69/bbl by June, 2017

August 15: Raymond James: "The recent crude pullback over the past six weeks has been largely driven by technical
trading patterns, as opposed to a departure from the supply/demand assumptions that share our longer-term bullish oil
fundamental thesis." They have not changed their forecast that WTI will average $80/bbl in 2017.

IMO the fundamentals definitely point to higher oil prices, but we cannot ignore that "speculators" set the price in the short-term. Also, all OPEC has to do is suggest that they are willing to curb production just a bit and oil prices will spike up.