Crude Oil: A New Equilibrium Price Range

Crude oil has nearly doubled from its February low and has carved out a fairly robust uptrend during the first half of 2016, recently finding support near its rising 50-day simple moving average:

 

WTI Crude Oil (Daily)

WTI_Daily_6.20.2016

The uptrend is impressive, however, there is substantial resistance in the low $50s which may serve to slow down the advance and generate a multi-month range-bound consolidation.

 

The current dynamic in crude oil is made all the more tenuous by the fact that much of the 2016 oil rally has been driven by a large increase in net length from macro and quantitative hedge funds:

 

WTI_Open_Interest

 

 

Oil_Length

Meanwhile, crude oil floating storage levels remain extremely elevated:

 

Global_Floating_Storage

However, the oil market is finally moving from surplus to deficit after spending the last couple of years in surplus:

Oil_Supply_and_Demand

In summary, it’s clear that lower prices and a growing world population has generated increasing demand. Whereas, lower prices have caused a noticeable drop in marginal supply. However, there is still an ocean of oil waiting to quench demand at higher prices.

The $45-$55 per barrel range may be the new oil equilibrium with drops below $45 creating a supply/demand deficit as marginal supply from higher cost producers falls off and demand gets stoked. While rallies above $55 will be met with an ocean of eager supply both from existing storage and higher marginal cost producers who will turn back on the spigots if they can make a profit again.

 

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