Short Term Footing for Crude Oil?

Marty McFly: I had a horrible nightmare. I dreamed that I went… back in time. It was terrible.
Lorraine Baines: Well, you’re safe and sound now, back in good old 1955.
Marty McFly: [opens his eyes wide] 1955?

Where’s the short term bottom for Crude Oil? Even though the price rose on Thursday and Friday, it was down about 3% last week and is down 21% in the past three months.

The forecasts are ranging wildly right now, and there seems to be stronger than normal fundamental and geopolitical factors at play. As the prices have dropped to this level, there is growing discussion that the Saudi’s are fine with rising inventories in the short term in the hopes of putting pressure on growing U.S. Oil production. Many feel a drop in Crude WTI below $80 would put profitability into question for a significant share of the market and slow production. There’s also recent speculation that the U.S. wants to continue to drive down prices due to ongoing tensions with Russia.

Suggesting further drops in price:

–  John Kingston, Director at Platts, “Usually you draw inventories in the fourth quarter. We’re probably going to build it,” Kingston said. “This is a very bearish scenario.” (CNBC)

–  Bob Iaccino, Tethy Partners, sees Crude bottoming out at around $75.

–  T. Boone Pickens, BP Capital Founder, “I can see it going under $80.  Under $80 you’re going to start to see the E&P companies, they’ll start cutting their capex and it’ll sober everybody up.” (CNBC)

Suggesting we’ve found footing at $80:

–  Jeffrey Currie, Goldman Sachs Head of Commodities Research, “Prices have likely overshot to the downside. This leaves us near-term constructive, despite being long-term bearish” (Bloomberg)

–  Ann-Louise Hittle, Head of Macro Oils Research at Wood Mackenzie believes too many governments in countries dependent on oil and gas revenues have too much to lose from a long-term price slump. “We do not think oil prices can remain well below $90 per barrel for this reason,” she says. (The Guardian)

At times like this, using the outcomes of historically similar environments provides a valuable and objective gauge for the most likely outcomes going forward. As stated by our friend Erik at Market Anthropology, “As is the case with all comparative reasoning, we primarily use the work to generate a strategic outline of what might lie ahead – based on similar market conditions in the past.”

Clients of EidoSearch software can answer the question, “when have we seen Crude Oil trade down like this over a 3 month period” in 3 seconds with statistical accuracy and then provide each of the analogs. We have also taken this a step further, through 9 years of back tests and research, to validate the predictive nature of this approach. That is, through content based search technology we are able to use actual return distributions historically to predict probable return distributions going forward.

Based on Friday’s close, we took a look at the current 3 month price trend, to see when Crude Oil has traded most similarly over the past 30 years and to see what is likely to happen over the next month. We found 47 statistically similar instances, and Crude is up 78.7% of the time an average of 3.8%. We also typically see most of this small recovery in the next week or so.

Please contact us if you would like us to run any custom studies looking at varying price trends and forward projections for Crude Oil or any security for that matter.  Have a great week.