Energy Prospectus

From a detailed technical analysis that I get.

West Texas Intermediate (WTI):
"The market has tested the $60/bbl support level for WTI four times over the last two weeks. $60 is psychological support. Daily lows just above $60 that have held with a bounce higher each time. So any large downside moves will have to first get through the $60 level, then find support at the $59.06 possible "pivot area". Note that the pivot price is converged with the 100 day moving average and the support line of the "triangle", very likely making this a critical area of support that if broken then allows for trade down to the lower objectives of $57.26, $55.24 (prior resistance and now a strong support level) and $54.36."

Bullish for the oil market:
1. Overall sentiment "feels" as though buyers are more than willing to buy any kind of reasonable price dip.
2. Global inventory levels are still cooperating to support high trade for now. < Supply/demand fundaments do matter.
3. There is a historical seasonal bias to higher price into May and June this time of year.
Bearish for the oil market:
1. The market may be getting "tired" of trying to trade higher.
2. U.S. oil production is nearly 10.4 million bbls/day and easily projects to 11.0 million bbls/day
3. Large hedge funds net aggregate speculative length remains near all-time record near 700,000 contracts. < This is my big concern
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My SWAG is that refiners come out of annual Q1 maintenance and their draws from crude oil storage move quickly to over 17.5 million barrels per day in April. IMO U.S. gasoline and jet fuel inventories are below where they should be today and refiners know that a big jump in demand for transportation fuel is just ahead. Low level of inventory at Cushing, OK is definitely bullish for WTI. Backwardation of the NYMEX strip is also bullish.

One thing that may be holding back investors (assuming that they are smart enough to see it) is the fact that upstream companies are more exposed to a pullback in oil prices than they were six months ago. U.S. public upstream companies have ~36% of 2018 hedged, but most of those hedges were layered on during the first three quarters of 2017 when oil was trading at $45 - $50. And they only have ~10% of 2019 oil hedged.

Backwardation of the NYMEX strip makes it "hard" to hedge because they would be locking in prices lower than we have today.

Note below is from Raymond James Energy Sector team's comments on their recent conference.

2018 oil price expectations were more bullish than “strip” pricing: Specifically, the crowd expected ~$60-70/Bbl year end 2018 crude prices (vs strip at $58 and RJ at $70/Bbl). As a quick review of 2017, WTI crude prices didn’t quite reach our lofty expectations by finishing at “only” ~$60/Bbl in 2017, but price did directionally follow our bullish 2017 oil call. Similarly, roughly ~70% of last year’s attendees proved to be more accurate than the futures strip calling for oil prices to exit 2017 between $55/Bbl and $65/Bbl. This year, we again asked attendees to share their expected crude oil price exiting 2018. It was very interesting to us that the consensus view on 2018 prices was within the narrowest band in recent memory! More than ~70% of attendees expect oil to exit between $60/Bbl and $70/bbl. This is well above the futures market at ~$58/Bbl, but below our estimate of $70/bbl.

We continue to believe current and projected global oil market supply/demand dynamics warrant crude prices that are more than $10/bbl higher than the December 2018 futures price. Additionally, we note there are numerous wildcards that could drive oil prices meaningfully higher than our model. Yes, we are fully on board with the notion that U.S. oil supply is growing fast and will continue to grow throughout 2018. However, we are holding fast to our view that the oil market is under-appreciating oil demand growth and the consequences of recently falling oil inventories will have upon the physical oil markets. U.S. crude inventories have declined at a massive ~400,000 bpd versus the 10-year average over the past ~12 months. We do acknowledge some short-term seasonal oil inventory headwinds but we expect these early 2018 builds to be much lower than normal.

More from the Raymond James conference:

WTI Backwardation: U.S. supply growth and the end of OPEC cuts remain the two biggest concerns (for stock investors). The forward market for WTI
crude oil remains in significant near and long-term backwardation, meaning that oil prices for near term delivery are much higher than contracts further into the future (i.e. long-dated contracts). At this point last year, the WTI market sat in modest contango for 2018-2020 delivery periods, meaning that prices were modestly higher for each subsequent delivery month (representing the cost of storage, or carry, in a relatively stable supply/demand environment).

While some level of backwardation is inherent in essentially all bullish oil market environments, the magnitude of today’s level of long-term backwardation tells us that the market values near term delivery (over the next 12-18 months) much more than future delivery, likely reflecting near-term supply tightness but longer term expected supply availability.

The fact that long-dated oil contracts remain substantially lower than front month pricing is one of the primary reasons – in our view – that oil and gas stocks in our coverage have failed to rebound as much as investors would have expected given the sharp rise in near term oil prices over the past four months. We should note that some of this is partially due to the strips limitation on E&P hedging.

To better understand the present situation, we asked for the top two explanations for today’s backwardation. Unsurprisingly, fear of U.S. supply growth at $65/Bbl and the potential end of OPEC production cuts were the most common responses. Surprisingly, electric vehicles (EV’s) killing demand was a distant third on the “worry” list followed by an economic slowdown. Despite placing third in our vote, we consistently hear generalists bring up EV's as their most common “worry” – and the topic lead to a lively debate over EV’s long-term validity. Overall however, investors seemed to agree with our view that EV’s may cannibalize a (modest) share of demand growth further out into the future, but are not the gasoline/energy industry killer the media often presents.