Lower for Longer: Bullish on WTI Crude Oil

Bullish on WTI Crude Oil at $41.85 for the next one to three months as of August 17, 2015.

We shorted WTI Crude Oil from $60 to $47 in the past couple months. We just turned from a bear to a bull. Couple brief thoughts are presented below.

Fundamentals

  • We know shale producers cannot be profitable at the current level. But they need to keep pumping oil to pay the debts they borrowed from the banks. And we know currently supply is more than demand.
  • We need to see more shale players going bankrupt to eliminate excessive oil production, but this has not been the case, at least not to the extent that we would like to see. That said, banks are running increasingly impatient with continuing to provide financing to shale oil companies. Bankruptcies and restructurings take time.
  • We need to see more middle eastern oil producing countries borrowing and cutting productions, besides Saudi Arabia. Middle Eastern countries are not winners either, based on our observations, at least not in the short to medium term. This has not happened yet.
  • We think the demand from China will warm up in the rest of 2015, as the real estate markets and the stock markets continue to recover, and the reforms continue to take place.
  • A true recovery of the price might need the aforementioned three factors to happen. If they do not happen this time around, then we expect oil price to fluctuate within a even lower bound from $38 to $55 to force a balance, as shale players have been cutting costs and becoming more efficient.

Dollar Effects Price In

  • The dollar might be going weaker for the short term to the surprise, as the consensus has been pricing in a September Fed rate hike. We think the strength of dollar has been priced into the WTI Crude Oil price. If the Fed happens not to hike the rate in September, which is what we are expecting, then we might see a boost effect on oil price from a weaker dollar.

Sentiment

We have surveyed the recent news and media reports. The investors and sell-side research analysts have turned extremely bearish as we have seen previously in March 2015. We believe the bottom is very close, but we are psychologically prepared to see $40 or $38 a barrel. We are not too bullish either unless we see some of the factors above happening.

How can we be wrong? 

  • If the Fed hikes once in September and again in December, which means dollar will get stronger from the current level.
  • If the shale players are still able to significantly cut costs from the previous levels, which means the rig counts continue to rise from the current levels. As a result, the production and the inventory are likely to rise from the current levels.
  • If the world economy, particularly China continues to slow further in the second half of 2015.

We are currently bullish WTI Crude Oil at $41.85 for the next one to three months.

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