The ‘black swan event’ that could send oil to $US25 a barrel | Business Insider

From Elena Holodny | May 24, 2016, 10:13 AM

Both WTI crude and Brent crude were around $US48 per barrel on Monday, well above their lows below $US30 per barrel earlier this year. But all of that may come crashing down if one “black swan event” transpires, argued a Bank of America Merrill Lynch global commodities research team.

From their recent note to clients (emphasis ours): “Global GDP in US dollar terms at market exchange rates is stagnant. Continued US dollar strength could force Saudi Arabia either to cut oil production modestly and push Brent back to $50 or de-peg the Saudi riyal, our black swan event, which could lead Brent to collapse to $25/bbl.”

While this certainly sounds ominous for the oil market, it’s worth noting that analysts and financiers are split on whether the Saudis will actually de-peg their currency and undo the current fixed exchange rate with the US dollar….

Source: The ‘black swan event’ that could send oil to $US25 a barrel | Business Insider

Gold-Oil ratio says “Sell”

Spot Gold recently recovered above $1100, suggesting a short rally fueled by concern over China. The gold-oil ratio, however, soared to 33, signaling that gold is highly overbought relative to Brent Crude. Last time the gold-oil ratio reached 30 was 1988 — when the Iraq-Iran ceasefire eased global crude shortages — and before that when the Saudis substantially hiked crude oil production in 1985. Any gold rally is likely to be short-lived — with stubborn resistance at $1200/ounce — and followed by a test of support at $1000/ounce*.

Spot Gold and Brent Crude

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

The last time (2008) that Brent Crude reached these lows, gold fell to $700/ounce.

Will Iran deal nuke crude?

The nuclear deal with Iran is likely to increase supply of crude oil, especially in European markets, driving down prices.

Brent Crude August 2015 Futures

Brent crude August 2015 contract (CBQ15 above) is testing support at $56 per barrel. Narrow consolidation suggests continuation of the down-trend. Breach of $56 would signal a test of primary support at $53.

Nymex WTI Light Crude August 2015 Futures

Nymex (WTI) Light Crude August 2015 contract (CLQ15) is in a similar pattern, with medium-term support at $51 and primary support at $49 per barrel.

Crude dives below $58

Nymex Light Crude closed below support at $58 per barrel, signaling retracement to test medium-term support at $53. Respect of $53 would suggest an advance to $68/barrel, while failure would warn of a test of primary support at $44.

Nymex WTI Light Crude and Brent Crude

 

June 2020 futures broke support, at $70/barrel, suggesting a test of $50/barrel*.

June 2020 Light Crude

* Target calculation: 70 – ( 90 – 70 ) = 50

Crude: Where next?

Nymex Light Crude plotted against CPI gives an historical perspective on current crude prices: high prior to China’s entry into the global energy market, but low relative to prices since then. Expect strong support at the 2008 low.

Nymex WTI Light Crude and Brent Crude

Has fracking permanently suppressed oil prices, or will production dwindle over time in response to lower prices? Oil well efficiency is rising as marginal wells are mothballed.

 

Production forecasts are rising.

 

Causing oil futures to fall. June 2020 Light Crude broke support at $70/barrel, offering a target of $55/barrel.

June 2020 Light Crude

* Target calculation: 70 – ( 85 – 70 ) = 55

Spot prices (Nymex Light Crude) continue to range between $58 and $61 per barrel. Reversal below $58 would signal retracement to test medium-term support at $54. Breakout above $61 is unlikely at present, but would signal a rally to $68/barrel.

Nymex WTI Light Crude and Brent Crude

Crude retraces

Nymex Light Crude encountered solid resistance at $60/$61 per barrel. Reversal below $58 would signal retracement to test the new support level at $54. Respect would indicate an up-trend, while failure of $54 would test primary support at $44. Brent Crude [green] is already retracing and likely to test support at $54.

Nymex WTI Light Crude and Brent Crude

Crude finds resistance at $60/barrel

Nymex light crude encountered resistance at $60/barrel. Expect retracement to test the new support level at $54/barrel. Respect would indicate a primary advance, while failure would suggest recent gains are no more than a bear market rally and another test of $44 is likely. 13-Week Twiggs Momentum below zero continues to reflect a primary down-trend.

Brent Crude and Nymex WTI Light Crude

Crude: Reversal or bear rally?

Inflation-adjusted crude oil prices are close to their 2008 low, but if we look back to the 1980s and 1990s, prior to China’s entry into the markets (apart from a brief spike in September 1990) that was the 20-year high.

Nymex WTI Light Crude over CPI

Nymex light crude rallied since breaking resistance at $54/barrel, but this does not necessarily indicate a reversal. Only retracement that respects the new support level (at $54) would confirm this a primary up-trend rather than a bear market rally.

Brent Crude and Nymex WTI Light Crude

Crude breakout: exercise caution

Nymex Light Crude broke resistance at $55/barrel, signaling the end of the narrow consolidation of the past few months. Some have heralded this as the end of the bear trend and start of a bull market.

Brent Crude and Nymex WTI Light Crude

If we examine the recent consolidation — shown here on June 2015 Light Crude futures — it is clear that it is broadening, with the second trough below the first, rather than rectangular. Peaks are likely to follow a similar pattern; so a higher peak does not necessarily mean a breakout. Broadening wedges tend to be unreliable reversal signals and I would wait for retracement that respects the new support level at $55 to confirm the breakout.

Nymex WTI Light Crude June 2015 Futures

Crude consolidates

Saudi Arabia bombs its neighbor Yemen. Another war in the Middle East and crude prices rally. Nymex Light Crude retreated above support at $45/barrel, testing $50, while Brent Crude found support at $54. The Saudis are obviously concerned about the success of Iranian-backed rebels in their close neighbor and are prepared to intervene militarily (Putin will probably send a telegram of support, attempting to draw a parallel although the situation in Ukraine is vastly different). Expect further consolidation between $45 and $55 for Nymex Light Crude. Supply continues to exceed demand and storage facilities are approaching capacity. The bear trend is likely to continue despite the current interruption.

Brent Crude and Nymex WTI Light Crude

Crude in contango

Nymex WTI Light Crude is testing resistance at $54/barrel, while Brent Crude is at $62/barrel. WTI above $54/barrel would signal a bear market rally, but is likely to leave the primary trend unaltered. Breach of support at $45/barrel would signal another decline.

Nymex WTI Light Crude and Brent Crude

The crude oil market is in contango, with spot prices lower than future prices, encouraging traders to store oil until prices rise. But Leslie Shaffer reports that oil storage is nearing full capacity:

“We’re going to see pretty fast inventory builds over the next few weeks,” Francisco Blanch, head of commodity research at Bank of America-Merrill Lynch, told CNBC Wednesday, noting that global supply is running around 1.4 million barrels a day above demand.

“If you run out of space, prices tend to react a lot more violently to adjust that supply and demand imbalance and that’s what we expect over the next few weeks,” he said, forecasting both WTI and Brent will fall toward $30 a barrel.

Crude oil: A zero-sum game?

“The current fall in price does nothing to offset the squeeze on the total economy from rising costs,” Grantham writes. “It merely transfers massive amounts of income from one subgroup (oil producers) to another (oil consumers), in a largely zero-sum game….”[Business Insider]

The above quote from Jeremy Grantham made me do a double-take. His “largely zero-sum game” refers to the global playing field. Oil producers such as the Saudis, Russia, Venezuela, Nigeria and Iran will earn less per barrel, while oil consumers like China and the EU will gain an equivalent amount per barrel. More importantly, oil consumers will receive a substantial boost to their economies. The “zero-sum game” assumes that crude production will remain constant. But consumption is likely to rise significantly as plunging oil prices deliver more disposable income to consumers, providing a massive stimulus to local economies. That in turn will lead to increased production of crude oil. A win-win for producers and consumers.

The Nymex Light Crude monthly chart shows a breach of long-term support at $75/barrel. Brent crude is in a similar down-trend. Target for the (WTI) decline is $40/barrel*.

Nymex Crude

* Target calculation: 75 – ( 110 – 75 ) = 40

Plunging prices may slow the establishment of new wells, but existing wells are likely to continue pumping as long as the price per barrel of crude is higher than the marginal cost. Marginal costs ignore sunk (or fixed) costs like exploration and establishing a new well. They are merely the variable costs that would be saved — like wages and consumables — if production is halted. Marginal costs are far lower than the producers’ total cost and are not yet threatened.

As for the long-term viability of producers at lower prices, the following chart is worth repeating. Prior to the 2005 “China boom”, the ratio of crude prices to CPI oscillated between 0.1 and 0.2. Over the last few years it has soared to between 0.4 and 0.6. A fall back to 0.2 would harm new, marginal producers (i.e. US fracking) but should not affect core producers. Whether governments reliant on “oil-welfare” — like Russia, Iran and Venezuela — are sustainable is an entirely different matter.

Nymex Crude

Crude oil: A zero-sum game?

“The current fall in price does nothing to offset the squeeze on the total economy from rising costs,” Grantham writes. “It merely transfers massive amounts of income from one subgroup (oil producers) to another (oil consumers), in a largely zero-sum game….”[Business Insider]

The above quote from Jeremy Grantham made me do a double-take. His “largely zero-sum game” refers to the global playing field. Oil producers such as the Saudis, Russia, Venezuela, Nigeria and Iran will earn less per barrel, while oil consumers like China and the EU will gain an equivalent amount per barrel. More importantly, oil consumers will receive a substantial boost to their economies. The “zero-sum game” assumes that crude production will remain constant. But consumption is likely to rise significantly as plunging oil prices deliver more savings to consumers, providing a massive stimulus to local economies. That in turn will lead to increased production of crude oil. A win-win for producers and consumers.

The Nymex Light Crude monthly chart shows a breach of long-term support at $75/barrel. Brent crude is in a similar down-trend. Target for the (WTI) decline is $40/barrel*.

Nymex Crude

* Target calculation: 75 – ( 110 – 75 ) = 40

Plunging prices may slow the establishment of new wells, but existing wells are likely to continue pumping as long as the price per barrel of crude is higher than the marginal cost. Marginal costs ignore sunk (or fixed) costs like exploration and establishing a new well. They are merely the variable costs that would be saved — like wages and consumables — if production is halted. Marginal costs are far lower than the producers’ total cost and are not yet threatened.

As for the long-term viability of producers at lower prices, the following chart is worth repeating. Prior to the 2005 “China boom”, the ratio of crude prices to CPI oscillated between 0.1 and 0.2. Over the last few years it has soared to between 0.4 and 0.6. A fall back to 0.2 would harm new, marginal producers (i.e. US fracking) but should not affect core producers. Whether governments reliant on “oil-welfare” — like Russia, Iran and Venezuela — are sustainable is an entirely different matter.

Nymex Crude

Falling crude threatens gold

Nymex Light Crude broke long-term support at $76/barrel, signaling a further decline. Sharply falling 13-week Twiggs Momentum reinforces this. Brent crude is in a similar down-trend. Long-term target for WTI is $50/barrel*.

Nymex Crude

* Target calculation: 80 – ( 110 – 80 ) = 50

Supply is booming and OPEC members appear unwilling to agree on production cuts [Bloomberg]. Goldman Sachs project WTI prices of around $74/barrel in 2015 [Business Insider], but the following chart of real crude prices (Brent crude/CPI) suggests otherwise.

Nymex Crude

Prior to the 2005 “China boom”, the index seldom ventured above 0.2. The subsequent surge in real crude prices produced two unwelcome results. First, higher prices retarded recovery from the 2008/2009 recession, acting as a hand-brake on global growth. The second unpleasant consequence is a restored Russian war chest, financing Vladimir Putin’s geo-political ambitions.

I suspect that crude prices are not going to reach the 2008 low of close to $30/barrel, but the technical target of $50 is within reach. Given the propensity of gold and crude prices to impact on each other, the bearish effect on gold could be immense.

Gold breaks key support level

A monthly chart of Gold shows the breach of support at $1200/ounce, offering a long-term target of $1000*. Another 13-week Twiggs Momentum peak below zero strengthens the signal. Retracement that respects the new resistance level at $1200 would confirm. Recovery above 1200 is unlikely.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Crude Oil

Crude is also falling — in response to the rising Dollar as well as expanding supply. The long-term target for Brent crude is $60*.

Brent Crude

* Target calculation: 90 – ( 120 – 90 ) = 60

…And $50/barrel for Nymex Light Crude. Follow-through below $75 would confirm the down-trend.

Nymex Crude

* Target calculation: 80 – ( 110 – 80 ) = 50

Commodities

Copper is below its 2011 low of $6800/tonne, reflecting weak demand from China. Follow-through below $6600 would confirm a primary down-trend.

Copper

Dow Jones UBS Commodity Index has already broken support at 125, suggesting a test of its 2009 low at 100.

Dow Jones UBS Commodity Index

The Global Drop in Oil Prices | Stratfor

Stratfor Vice President of Global Analysis Reva Bhalla and Global Energy Analyst Matt Bey discuss highlights of an upcoming series on the geopolitical impact of oil below $90 a barrel.

Crude oil threatens support

Brent crude [pink] has already broken long-term support at $90/barrel and Nymex Light Crude [blue] is testing similar support at $78 to $80/barrel. Breach would confirm a primary down-trend and a long-term target of $50*.

Nymex WTI Crude

* Target calculation: 80 – ( 110 – 80 ) = 50

Crude targets $75

Nymex Light Crude is headed for a test of major support at the 2011 low of $75/barrel after breaking support at $92/barrel. 13-Week Twiggs Momentum (below zero) already signals a down-trend. Brent Crude has also broken primary support, but is maintaining a premium of $5 to $10 per barrel.

Nymex WTI Crude

* Target calculation: 92 – ( 110 – 92 ) = 74