Energy Prospectus

The near-term outlook is about as bearish as it gets for crude oil prices. My take is that we may see oil trading in the $40s, but if that happen I believe we will see an emergency meeting of OPEC. Everyone knows today's oil price is unsustainable, unless Saudi Arabia is on a "Suicide Mission" and wants to bankrupt most of their fellow OPEC countries.

Analysts see oil prices weakening further through the second quarter before leveling off and rising in the fourth quarter. Saudi Arabia Monday cut its U.S. price for oil for February delivery, appearing to ratchet up the price war that has pitted OPEC against U.S. shale producers. Saudi Arabia trimmed its official price for light oils by $0.60 per barrel. [Which makes today's $2.75/bbl drop in Brent seem a bit of an over-reaction to me.]

> Citigroup shaved its forecast to an average Brent price of $63 per barrel this year, from a previous forecast for $80. The analysts said the market should "sort itself out by the end of 2015" and that Brent should trade within a range of $55 to $70, and then average $70 a barrel in 2016. "Now there are signs that Saudi Arabia might be increasing its market share on the U.S. Gulf Coast once again, adding further to price pressures in the U.S. market, with direct ripple effects in global markets in Q1," wrote the Citigroup strategists.

> Here is the most bearish forecast I've seen: "The ultimate target is now $33. That's how it sets up on the charts and that's a pronounced double bottom," said John Kilduff of Again Capital. He said the market consolidated in December, but is now set on forging new lows. WTI closed at $33.98 on Feb. 12, 2009, and it is now trading at levels last seen in April 2009.

> Morgan Stanley has an average $70 per barrel target on Brent, with an average of $69 per barrel in the first quarter and a $57 target for the second quarter before a third-quarter rebound. Their bearish case is that Brent averages $53 per barrel in 2015 and hits a low of $43 in the second quarter. The Morgan Stanley strategists say there are new reports of unsold West and North African cargoes, with much of the oil moving into storage. They also note that new supply has entered the global market with additional exports coming from Russia and Iraq, which is reportedly seeing production rising to new highs. Russia's oil output rose to 10.58 million barrels per day last year, up 0.7 percent, a post Soviet high, according to Reuters. Iraq exports were reported to be the highest since 1980 in December.

> The Citigroup analysts say Saudi Arabia now appears to be sending more oil into the Gulf Coast after losing close to 50 percent of its U.S. customer market. The loss was in part due to the fact the Saudis did not price crude to meet the U.S. market, where prices were hit by a glut of light sweet crude, the analysts wrote. Saudi exports fell in the fourth quarter to about 850,000 barrels a day, well off the 1.6 million barrels a day it averaged in the year earlier, they noted. While Saudi Aramco had pursued a strategy of cutting prices in Asia to secure market share for its oil, the Citigroup strategists said it has lost share in China due to that country's deals with Russian companies, a slower-growing economy in China and falling demand. The U.S. is one of the only markets with the scale to absorb a big share of Saudi oil.

> The Citi strategists say their bearish case, which they give odds of 30 percent, is that Brent averages $55 per barrel in 2015, but the result would be a bigger bounce back in 2016 to $73 per barrel. West Texas Intermediate would average about $8 less than Brent, they added. Sour crude, which is the type Saudi Arabia exports, is also the type that will be coming in more abundance from Canada. The global supply glut had been in light sweet crude, the type once imported into the U.S. from Africa but now provided from the Bakken and other U.S. shale sources. Citigroup said the volume of Canadian oil into the U.S. could increase by 200,000 to 300,000 barrels a day and possibly to 350,000, as more oil comes from the midcontinent to the Gulf Coast. One contributor is the 600,000 barrel a day Flanagan South pipeline that started line fill in December to take oil from Illinois to Cushing, Oklahoma.

MY Take: After OPEC has a chance to analyze the impact of the drastic cuts to U.S. E&P capex programs they will know that shale oil production will be falling by the 3rd quarter. Assuming OPEC does not have an emergency meeting earlier, I believe there will be enough evidence for them to take the steps necessary to shore up prices. Six months of this and the Russian economy will be crushed.

http://www.nbcnews.com/video/cnbc/56646632/#56646632

You all need to watch the video at the link above. I just got off the phone with John Hofmeister, former CEO of Shell. He thinks this current drop in oil prices is being driven much lower than supply/demand justifies. He thinks it is being driven low by the traders, who live off the volatility.
We had a nice 20 minute chat and John thinks we will see a V-shaped rebound this quarter with oil running up to $100/bbl or higher by year-end.

John knows more about the global energy markets than all of us put together.

I'm thinking more than one hedge fund has gotten crushed by the rapid drop in crude prices and is being forced to liquidate some positions, and this is also contributing to the oil price fall. Falling oil prices + stronger dollar + Greece = Euro, emerging mkts, and energy sector in free fall

Speculative traders outnumber commercial traders by about 18 to 1. A big part of the drop in NYMEX futures contracts is hedge funds (speculative traders) going short oil contracts to hedge their stock holdings.
If OPEC does call an emergency meeting we could see a major short covering rally.

Stephen Schork, Founder and Editor of the Schork Report, told CNBC that crude oil hedging floors of $30 traded 46,000 contracts in the last two weeks, meaning E&Ps are confident the price is going much lower. “We don’t know how much lower we can go, but I certainly wouldn’t want to be buying in at this level,” he said. Schork added that open interest on a $40 floor for February increased by more than 400% “in the last few weeks,” which implies some of the market believes oil will drop below $40 by January 20 – the date February contracts are set in stone.

“We’re at the stupid range,” Schork said. “It’s similar to 2008 when we knew oil at $120, $130 and $140 made no sense, but high prices became the reason for higher prices. It’s the same thing in reverse.”