About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Monday, February 16, 2015

Oil Price -- Let The Battle Begin

Veteran oil price traders know that the oil price is nearing the seasonally strongest period of
the year at February's end. At this time, seasonal demand for oil is set to strengthen sharply in
anticipation of the the onset of the "driving season" in the northern hemisphere when the call
on gasoline flares up. With evidence that the North American rig count is falling, some traders
have begun to establish long positions in the expectation that a sinking rig count signals an
eventual drop off in now fast rising new US field crude output with the upshot that production
excess will be curtailed, thus leading to the restoration of improved balance between supply
and demand. This move is underway despite trader awareness that US crude inventories are
now very high for the past quarter of a century and 16% above comparable 2014 levels along
with the knowledge that production excesses could grow larger before enough wells are
capped to reverse the process. It is perhaps important to note that the stats on the NA rig count
are not at all dinky. Working rigs are down 27% on a y/y basis.

Long side confidence is being boosted by the fast coming onset of the rise in seasonal demand
to peak levels later in the year. We do not know yet whether this confidence will hold over
the course of 2015 as domestic crude output and inventories rise further. It is too early to tell
yet whether the recent anticipatory rally will have staying power or is a mere dead cat bounce,
and it is early in the game to determine when the price recovery, should it proceed further, will
lead to a positive reversal in the rig count which would dent the bull case. WTIC Daily

From a technical perspective, there have been positive reversals in shorter term RSI and MACD
and the market is challenging its 50 day m/a. Moreover, WTI crude remains at a sizable discount
to its 200 day m/a. And, check out the powerful long side volume. The should gain credence
if crude rises above $54 and begins a positive trend reversal. In addition, any sell-offs in the
short run need to be contained in the mid - $40s.

There are enough moving parts in the equation, both fundamental and psychological, to make
an extended time long side trade plenty risky.

If the market is truly poised to return to significantly improved balance, then a price of $70 bl.
by the end of Q 3 would not be unreasonable.
 

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