Crude oil slide nearing decision point

$85 or Bottom!

Ok, I know it was just two weeks ago when I wrote $100 or go bust and last Friday when I wrote $90 or bust, but now I am saying that crude could be ending its slide. That is as long as $85 holds. You see it was just three weeks ago when oil was solidly above $100 a barrel. Many felt that $100 a barrel would hold, yet as I wrote on May 4, “The bullish oil price scenarios are giving way to what seems to be ever mounting supply. … so we have growing odds of a continuing price collapse.”

 

And when $100 fell, I wrote, “ Ok, I know it was just last Friday when I wrote “$100 or Go Bust” but because so many oil bulls expressed disbelief that oil could actually stay below $100, I should warn those people that they should stop worrying about the break below $100 and start worrying about whether $90 can hold. The West Texas Intermediate oil contract is giving way to a host of global economic worries and the weight of ever mounting supply. Yes, I know last week I wrote the bullish oil price scenarios are giving way to what seems to be ever mounting supply and that lowered demand expectations and so we have growing odds of a continuing price collapse but when you are right you are right. While oil seemed to hold $95 yesterday the fundamental outlook continues to look heavier and perhaps even heavier than it did just one week ago.

 

Of course $90 did fall because not only did we see US oil supply hit the highest level since 1990, again we heard from OPEC and the International Energy Agency that oil production is far exceeding demand. According to the IEA OPEC is producing 31.44 million barrels a day led by Saudi Arabia which is pumping out the most oil in about 30 years.

 

I spoke about the impending drop and said what we were seeing was a major unwinding of the Iranian war premium. Not only is the risk of war less likely, the market has already replaced Iran’s supply. Increased U.S. and OPEC production as well as Global Strategic Reserves filled to the brim the risk posed by the loss of Iranian oil has been negated. Add to that the UAE's strategic oil pipeline for bypassing the Strait of Hormuz is complete and we are going to see the reversal of the Seaway Pipeline to get oil out of Cushing Oklahoma to the rest of the world is another factor that will pressure price.

Yet now that $90 has fallen it is very possible that this run to the downside should slow. Technically speaking a test of just below $90 was in the cards and it is very like that oil has hit its value zone. With Iran talks being kicked again down the road until June in Moscow, and refiners getting to ramp up with better margins we should find comfort in a range from $89 to $95.

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