• Weekly oil related comment of March 7, 2016

    Over the weekend, I found this ZH article about oil that looked interesting if put in context.
    However, I question its conclusions in regard to timing. The article wants us to believe that the short-covering is over, but the figures that are used as substantiation fail to support that conclusion.

    http://www.zerohedge.com/news/2016-0...arish-oil-bets

    If we look at the "capitulation" spikes of March and April, we can see that there were two, about two weeks apart, and even after the second spike at the end of March, the oil market did not roll over for another two full months.

    If we are in exactly the same situation - which is an assumption that is unhealthy to make - then we should expect more short-covering that will push oil to about $45, followed by a sideways stable move.



    The second figure is even more eye-opening.

    The main question to ask is why there was a spike in short ETF buying in January and no such spike in July. It is because ETFs are mostly used by retail and in January, the lifting of Iranian sanctions was all over the press. This spike does not reveal anything else. The fact that it reverted down certainly has pushed the price of oil higher, but this is hardly a valid "prediction" regarding the next move.



    This is the real difficulty: trying to balance motives, technicals and fundamentals.

    Regarding fundamentals, the figure below dates from early February, but it shows that US shale oil production has difficulties slowing down: US production took six months to decrease by 500,000 barrels per day....



    http://marketrealist.com/2016/02/us-...catalyst-2016/

    whereas in the last two months alone, IRAN has pushed its daily production to 2 million barrels per day. The oversupply will take much time to regulate itself.

    http://www.reuters.com/article/us-oi...Name=ousivMolt

    But still, the motivation behind the oil price bounce is understandable. We can see below that a few very indebted oil and nat gas producers have seen incredible price bounces in the past few days. It is because most have started to negotiate extensions with creditors. This extra time will allow them to restructure their debt (use convertible debt or issue new equity.) The only thing that is needed in to keep oil prices higher for a relatively longer period of time in order to allow these producers time to file the necessary documentation.

    This buying spree is also probably Fed approved since the Fed is afraid of bad debt contagion.




    Conclusions:

    Even though fundamentals look dismal for oil and for energy companies in general, both the technicals (short squeeze is not over) and the motivational aspects (time for debt restructuring) tell us that oil could even move higher and stay higher until May.
    Comments 2 Comments
    1. adam ali's Avatar
      Pascal,

      Per your comment above about ETF buying/selling above, Dr. Brett Steenbarger recently wrote an interesting article on how to use such activity to gauge sentiment. Worth a read:

      http://traderfeed.blogspot.com/2016/...-of-stock.html

      Adam
    1. Pascal's Avatar
      Quote Originally Posted by adam ali View Post
      Pascal,

      Per your comment above about ETF buying/selling above, Dr. Brett Steenbarger recently wrote an interesting article on how to use such activity to gauge sentiment. Worth a read:

      http://traderfeed.blogspot.com/2016/...-of-stock.html

      Adam
      Thank you Adam.

      This was an interesting read.



      Pascal