I have to say the last time I saw the oil market more concerned with a race riot rather than an ship taken hostage in Iran, OJ was wearing Isotoners. The oil market is in a state of confusion and I’ll skip the worn out Bruce Jenner jokes here. Funds are piling back into the oil futures and as well they should. Everyone has this grand idea that our high crude supply and the fantastical production on crude in America is never going to stop. Not so my teeming millions. I’ll give in to the idea that even if we ran refineries at record levels this year (we will), we’re still going to have plenty left over and should leave us at levels we usually start the summer with in the past. The issue I have is that we’re going to see all of our record level of production fall and fall fast.
Too many are starting to take the hedging activity in the market as a sign that things aren’t as bad as we thought. As John McLaughlin would say, “WRONG!”. The hedging activity we’re seeing now is mainly about oil companies that are already deep in debt reaching for the panic button. We’ve discussed our theory that many oil companies are hedged up until the end of the year, but we’re another month closer to the halfway mark of the year and the noose is starting to tighten. We have seen some companies like Energy XXI secure more money with a secondary offering last week of $1.2B of junk bonds. That money is being used to pay off debt that they have due soon. If you are adept at paying off your credit cards with new credit cards, you know the game. In other words, they are raising cash with debt to pay off debt and buy time. The recent move to $58 has been promising, but as the stakes get higher and we see third mortgages get taken out on more oil producers, we’re going to need to see $80 to break even.
Here comes the problem, that time that people are banking on has a lot shorter time frame than the hedges might have in play. Just as we saw oil prices start the decline back in October, we may have the same situation come along this year too. As I mentioned, the oil production may not be as high as we saw it in 2014 (9.2M b/d), but we might presume that we’ll at least be above 8M b/d. If OPEC doesn’t budge and we continue to see a splintering of the Arab States, global production might be higher. That may seem counterintuitive to the Brent market, but a lower priced foreign crude will help increase the opportunity to spur consumers back in the US. As the that we’re going to see a lot more of the mid and lower tier producers are going to just have to stop, drop and roll over. We’re going to need not only a move back to the $80 area for WTI to help production pick back up where it had left off, but it’s going to need enough time up there to make an impact. I feel like this is all a build up to the NFL draft. The clock is ticking and all we’re doing now is just waiting to see who the next company is going to step up and fail on The Price is Wrong.
Crude: Now that we’re moving into the real refining season and on to the June contract, things get a little different here. We can start with the momentum shift and the turn in the tide. We’re going to start thinking about a recover period and the upside target now becomes 7000. It may seem like a long way away, but we do have time here. Moving to CLM5 with resistance at 5749, 5848 and 5955. We’ll be careful with support here
to 5666, 5542, 5450. The front spread moves to MN with resistance at –140, -118 and –93. Support can get back to –166, -182. We’re thinking we can make a move higher from here after stats.
Gasoline: We’re moving along with the RBM5 contract as cash trade moves forward. We’re looking to resistance 20066, 20246 and 20443. That will give us some room to look back down to support at 19828, 19635 and 19124. The front spread moves to M5/N5. Resistance at 166, 198. Support to 119, 75. The RBCL moves to M15 and gets to resistance at 2680, 2734. Support down to 2624, 2580.
Distillate: The move is ahead and we switch months and ahead to the HOM15 contract. We’re looking at support to 19168, 18970 and 18745. The resistance looks above to 19318, 19545 and 19764. The front spread is in M5/N5 with resistance at +02, +46. With the way it’s moving we may not see support tested, but looking to –58, -94. The HO crack in M15 sees resistance at 2402, 2458. Support back to 2358, 2314.