A kite rises going against the wind; and so to this forecast as we are calling for higher oil prices running contrary to most analysts (Goldman) opinion of much lower prices. However, like the blustery wind lifting a kite, the winds may subside and so too the duration of this forecast. Indeed make no mistake we are not calling for a major bottom (at least not yet); we are only forecasting a trading bottom with initial price targets of 52-55, then 62-65. The most likely time horizon is our first objective (52-55) reached by Halloween and the next target (62-65) by the middle of Q1 2016.
Our reasons are:
- Baker Hughes announces a long string of dropping rig counts as producers are cutting supplies.
- S. oil production has now fallen to 9.1 mpbd (million barrels per day) which is 25% off recent previous highs. Industry forecasts are for production to fall even further to approximately 8.6 mpbd by mid-2016.
- Production has been steadily declining in both Saudi Arabia and Russia despite indications to the contrary.
- Today, the world is less over-supplied than it was a year ago. This is not to say that a global recession may further reduce demand and therefore the supply will remain abundant, but the pressure is now easing. Global macro conditions discounting contraction have been largely priced-in over the past year’s 50%+ drop in crude … global economic stabilization over the near term may re-adjust macro models regarding oil demand. The Joint Organizations Data Initiative (JODI) already is suggesting the demand remains strong in the U.S. and China and a wide variety of other countries
- The dollar has been nudging stronger theoretically making oil less expensive in USD terms … however; oil is climbing higher despite the hurdle of a higher USD. The same inverse indicator is true with oil vs. 30 year US Treasuries.
- Technically speaking, the charts are showing signs of an impending bottom; albeit at this writing, merely near-term. We see support in oil between $42-44 and in RBOB between $1.34-1.35. A closing break of either support zones would threaten our near-term forecast of oil between $52-55 and RBOB between $1.60-1.70
Make no mistake, we are not betting the house on this outcome as we too believe there are issues going forward with central planners, money printing, zero-bound interest rates and political jousting which may include another round of threatening government shutdowns. However, we do like the risk/reward for the near-term upside in both crude oil and reformulated gas products.