With its significant fall from grace, speculators are busy betting on
a bottom in crude and related oil & gas stocks. However, all those
bottom calls may be in vain, according to a new report from Citi - which
is getting a lot of attention on Wall Street Monday. Citi's commodities
strategists Edward Morse wrote that the recent rally in crude prices
looks more like a head-fake than a sustainable turning point and he sees
oil heading to as low a $20 per barrel.
Morse said the recent rally was driven by drop in US rig count, continuing cuts in upstream capex, the reading of technical charts, and investor short position-covering. However, short-term market factors are more bearish, pointing to more price pressure for the next couple of months and beyond.
"Not only is the market oversupplied, but the consequent inventory build looks likely to continue toward storage tank tops," he wrote. "As on-land storage fills and covers the carry of the monthly spreads at ~$0.75/bbl, the forward curve has to steepen to accommodate a monthly carry closer to $1.20, putting downward pressure on prompt prices. As floating storage reaches its limits, there should be downward price pressure to shut in production."
The analyst doesn't see oil hitting a bottom until sometime between the end of Q1 and beginning of Q2 at a significantly lower price level in the $40 range. This, he said, is when markets should start to balance, first with an end to inventory builds and later on with a period of sustained inventory draws. While he said it's impossible to call a bottom point, oversupply and the economics of storage could push prices of WTI well below $40 and perhaps as low as the $20 range for a while.
Morse said it's highly unlikely that oil prices will follow an L-shaped future. "Prices are already too low to be sustainable," he said. "Now in a $45-55 range (whether Brent or WTI) they’re at a level that would result in disinvestment from oil. Capex would focus on cash generating activities, monetizing past spending – developing delineated discoveries, completing wells, but would avoid new acreage acquisition, seismic studies, exploratory drilling, and expensive marginal well drilling. Depletion rates would rise, supply growth would slow and then fall under a long, cold supply sweat."
He said a U-shaped recovery looks superficially more plausible, with prices falling to around $45 Brent, $35 WTI and lingering therefore before recovering. "But this likely underestimates the demand response and overestimates the robustness of supply to sustain production below operating costs for a significant portion of global output," he said.
While Big Oil and smaller E&Ps are focusing on a V-shaped price response this year and next, Citi believes a W-shaped path most likely, with the “Call on Shale” replacing the traditional “Call on OPEC” as a new barometer. - on Shale” replacing the traditional “Call on OPEC” as a new barometer — with low prices squeezing shale oil output growth and a price recovery resulting in a robust US supply response creating another price dip and a recovery to a new equilibrium level.
The firm reduced their WTI base case to $54 for 2015.
Related ETFs: iPath Dow Jones-Goldman Sachs Crude Oil Fund (NYSE: OIL), United States Oil Fund (NYSE: USO), Energy Select Sector SPDR ETF (NYSE: XLE).
(Source StreetInsider)
Morse said the recent rally was driven by drop in US rig count, continuing cuts in upstream capex, the reading of technical charts, and investor short position-covering. However, short-term market factors are more bearish, pointing to more price pressure for the next couple of months and beyond.
"Not only is the market oversupplied, but the consequent inventory build looks likely to continue toward storage tank tops," he wrote. "As on-land storage fills and covers the carry of the monthly spreads at ~$0.75/bbl, the forward curve has to steepen to accommodate a monthly carry closer to $1.20, putting downward pressure on prompt prices. As floating storage reaches its limits, there should be downward price pressure to shut in production."
The analyst doesn't see oil hitting a bottom until sometime between the end of Q1 and beginning of Q2 at a significantly lower price level in the $40 range. This, he said, is when markets should start to balance, first with an end to inventory builds and later on with a period of sustained inventory draws. While he said it's impossible to call a bottom point, oversupply and the economics of storage could push prices of WTI well below $40 and perhaps as low as the $20 range for a while.
Morse said it's highly unlikely that oil prices will follow an L-shaped future. "Prices are already too low to be sustainable," he said. "Now in a $45-55 range (whether Brent or WTI) they’re at a level that would result in disinvestment from oil. Capex would focus on cash generating activities, monetizing past spending – developing delineated discoveries, completing wells, but would avoid new acreage acquisition, seismic studies, exploratory drilling, and expensive marginal well drilling. Depletion rates would rise, supply growth would slow and then fall under a long, cold supply sweat."
He said a U-shaped recovery looks superficially more plausible, with prices falling to around $45 Brent, $35 WTI and lingering therefore before recovering. "But this likely underestimates the demand response and overestimates the robustness of supply to sustain production below operating costs for a significant portion of global output," he said.
While Big Oil and smaller E&Ps are focusing on a V-shaped price response this year and next, Citi believes a W-shaped path most likely, with the “Call on Shale” replacing the traditional “Call on OPEC” as a new barometer. - on Shale” replacing the traditional “Call on OPEC” as a new barometer — with low prices squeezing shale oil output growth and a price recovery resulting in a robust US supply response creating another price dip and a recovery to a new equilibrium level.
The firm reduced their WTI base case to $54 for 2015.
Related ETFs: iPath Dow Jones-Goldman Sachs Crude Oil Fund (NYSE: OIL), United States Oil Fund (NYSE: USO), Energy Select Sector SPDR ETF (NYSE: XLE).
(Source StreetInsider)
