How low is “too” low?

Crude oil supplies are massive. Prices remain weak. But are current fundamentals now priced into the market? Perhpas, which provides a profitable opportunity. To paraphrase a trader friend of mine, “If you liked it at $50, you’ve got to love it at $30.”

If you think oil prices could be reaching value levels near $50 per barrel, this month’s market special is going to show you how to own it at $30. But first let’s talk about the reasons why it will probably never make it there.

Crude prices stabilizing?

In case you were on a submarine below the Arctic ice for the past 12 months, the decline in oil prices has been the financial news story of 2014 and continues to dominate headlines in 2015.

In short, the story is: the fracking boom in the United States, an unrestrained OPEC and slowing global economies. Shake well. Pour out a world oil glut. Result? Oil prices dropping by 57% in just the last seven months, their lowest levels since the great recession.

The story is primarily a supply one. U.S. oil supplies hit a fresh record high last week at 413.06 million barrels. Energy Information Administration (EIA) crude stocks are 54.975 million barrels above year ago levels.

Yet prices appear to have hit a consolidation level between $45 and $54. It’s hard to see the fundamentals getting any bleaker than they are now. But prices seem hesitant to push much below $45. Why?

While this is not an “it’s always darkest before the dawn” story, there comes a point where current supply is priced into the market and the market needs more bearish news to continue the trend. It is our opinion that the worst of the supply side story has been priced in and the news over the next 3-6 months could be, how do we weigh “less bearish?” 

What is driving the supply glut?

We are constantly looking behind the news to uncover the core fundamental driving price. It is the key to uncovering option writing opportunities.

The first thing you should realize about the current glut in oil is that Saudi Arabia is driving the boat. It was the Saudi’s choice to ramp up production instead of cut back to support price last year. It is speculated they did this to accomplish three main objectives:

1. Punish Russia for its support of Syria

2. Punish Iran for its nuclear program

3. Slow down the U.S. fracking industry

One could argue it has accomplished all three.Russia’s economy is in shambles due to slashed oil revenues (amongst other things). Iran not as bad yet but getting there. As for U.S. frackers; their eyes are watering.