David Fuller's view -
When we look at their price patterns, there is some technical support at current levels for both [crude oil and oil shares] (see horizontal lines above). Sentiment in the short term is getting close to a pessimistic extreme (see Weekly Chart below), but the primary trends (not shown) are still firmly down. Interestingly, our chart above shows the Energy sector’s relative performance has clearly broken below its March low, whereas oil prices have not. This observation suggests to us that Energy investors are now coming to terms with the idea of lower oil prices for a longer period of time. We think they are right, and the risk for oil prices is that they ultimately break down to a lower low, potentially even re-testing the 2008 lows in the mid-to low-$30s price range. Should that occur, the fundamental case for a longer term bottom would be more compelling as it would likely solicit both a supply and a demand response. Our current fundamental view on oil prices is that a trading range is forming with an upside cap somewhere between $60 and $70, which is where the short-term supply from US producers will increase. As yet, we do not have a strong fundamental view regarding the bottom of the range. In the meantime, we suggest patience.
The key variable with any commodity is usually supply. Currently, the world is awash with oil. Traditional producers did not anticipate the technological developments, including fracking, which have produced additional supplies of crude oil. Shocked by their significant loss of revenue, they have responded by increasing production. The Saudi’s, in particular, are waiting, expecting, hoping… that higher-cost production slumps.
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