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Takeaway: OIL remains in a BEARISH Set-Up without a near-term catalyst to put in a hard support level.

In three recent notes, we highlighted why oil had more downside pressure:

TAKEAWAY: “The expectation for a supply/demand floor is not a catalyst for volatility-induced real-time market moves”

TAKEAWAY: “A production cut from OPEC near-term is unlikely, especially with new competition threatening to take global market share.”

TAKEAWAY:

  • “Most analysis has underestimated technological advancement in production and recovery efficiency
  • Model-driven analysis in this space anchors on old information, holding rapidly changing variables static, rather than leaning on real-time, data-driven facts

The biggest mistake in consensus analysis is that it does not accurately weigh each production area within a formation. It uses a gross average for each area within a formation with each area equally weighted.

The lowest cost areas are by far the largest producers. For example McKenzie County, ND in Bakken makes up almost 1/3rd of the formation's production and is by far the lowest cost area with a break-even price in the $20-$30 per barrel range.”

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WTI Crude Oil is BEARISH on both a TREND and TAIL duration:

Oil would have to retrace and move above its intermediate and longer-term resistance levels for our model-driven process to shake its bearish bias over those durations.

TRADE (3 Weeks or Less) Risk Range: $76.43-$80.51

TREND (3 Months or Less) Resistance: $91.67

TAIL (3 Years or Less): $96.05

OIL: MORE DOWNSIDE? - WTI Levels

With the domestic economy slowing and deflation taking hold (#QUAD4 set-up), monetary policy out of the ECB and BOJ continue to provide support for lower oil prices.

Both WTI and BRENT moved out of red territory this morning after marginally bullish U.S. inventory data from the Department of Energy and news of a pipeline explosion in Saudi Arabia. While the weekly inventory data is always a catalyst for intraday volatility on the number, we disregard the weekly comps until we see an extended sequential trend in the time series.

Very simply, we continue to believe supply cuts near-term will disappoint to support current price levels.

Conclusion:

  • The November 27th OPEC meeting is unlikely to bring news of a collective supply cut (the aforementioned note from October 23rd explains this argument in more detail)
  • Because of the 1) Upfront Capital Commitment for many projects, 2) long-term contractual commitments, and 3) the lag for daily mark-to-market losses to become real, booked reported losses production will continue until at these levels or lower over the intermediate-term

Please reach out with any comments or questions as we continue to comment on this topic.

Ben Ryan

Analyst