WTI Consolidates on WeaknessIn my previous analysis "Que 2008," I likened this drop in oil similar to the one we've seen in 2008. This was based on both over leverage in the oil and equity markets, diverging fundamentals and a strengthening dollar throughout 2009 - which brought on deflation.
Prices did collapse through $60 as expected, and nobody is willing to cut production to reserve market share. The UAE Energy Minister said $40 oil is quite possible and nothing to worry about within a three-month period.
The problem is, whether it's OPEC nations or US shale producers, lower prices will cause ongoing degradation of the sector.
US energy CAPEX looks to be reduced significantly (2/3 CAPEX in S&P500), as producers are already cutting jobs, future CAPEX and turning rigs offline - as we seen in 2008.
Some have hope that these moves will help position companies for a bounce back. However, I liken that to companies cutting jobs and buying back shares to boost earnings. It doesn't work in the long run.
Without demand, oil will remain much lower than previously seen. Limited growth in the US and emerging markets and no growth in Europe is setting the stage for subdued prices.
If WTI closes below $53.50 per bbl, I expect technical "trap door" selling, and we could see mid-$40s per bbl.
Conversely, a close above $59 could send prices to $65 per bbl in order to re-balance to sharp decline. However, if fundamentals remain weak, support will remain weak.
