Short Term Fundamentals of Oil Are Very Bearish as Cushing Inventory Reach Their Max Capacity

While most market participants are being ultra-bullish on price of oil, I remain a sceptic over the next few months for the following reasons:
  • Price forecasts are now aiming for the moon, with targets easily reaching $200 or $300
  • The CoT report from the CFTC shows that speculation has run so wild that it exceed everything we experienced in the past few years, speculators are even more bullish now than when oil had reached $147. See the nice chart here.
  • Inventory of oil have been steadily increasing over the past few months in the US. This means that demand is weaker than supply.
  • There are serious issues in the middle east, but production hasn't really been impacted yet.
As you can see, both the sentiment and the fundamental are already very bearish for oil. Well on top of that, Dian over at EconMatters has published a great post showing that there will very soon be no more storage available at Cushing. And he forecasts that WTI will trade at $90 within a month. Here a few quotes from this great post:
The latest inventory report came out on Wednesday, March 30 from the U.S. EIA showing Cushing stocks at a record 41.9 million barrels. The news is only going to get worse for WTI longs, as the next couple of weeks will bring the total storage at Cushing close to the max capacity of 44 million barrels due to the fact that more traders took delivery on WTI (West Texas Intermediate) on the last CL rollover.

There is a three week span after the expiration where actual physical delivery takes place, so expect the next two EIA reports to test whatever remaining spare capacity exists at Cushing. In other words, it doesn't really matter what is occurring in the MENA (Middle East and North Africa), since over the next month at the next rollover, traders will have to sell any long positions because they cannot take delivery even if they want to.

Furthermore, because of the events transpiring in the MENA over the last couple of months, traders who normally don't take delivery have taken delivery over the last two rollovers, due to ‘what if” scenarios where Saudi Arabia became a legitimate concern, and oil spiked to $130 a barrel. The fallout from this is that traders and investors who normally take delivery will not be able to during this next rollover, as there will literally be no more storage at Cushing.

This is very bearish for WTI prices over the next month, as now you are going to have an entirely new segment of sellers come rollover time. As such, expect the U.S. WTI prices to overshoot to the $90 a barrel range
The consumer and the US economy needs lower prices to grow at a significantly higher rate in order to make a dent in an overall saturated oil market. The longer prices stay artificially high, and not reflect true demand in the market, given the current oversupply situation, the correction, when it does occur, will be even sharper (For example the 2008 Oil collapse).

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