07-01-2017: September Crude Oil: Below Cost of Shale Production

(Click on links below. Whole page needs to load before links work.)


Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calend Spread

Level Table
Other Factors



5 Despite a lot of recent weakness in the crude oil market, we have one of the strongest overall buy signals of all commodities recently tested in our system. We agree with a recent report put out by Goildman Sachs stressing the importance of shale oil production costs in the total picture. At somewhere around $50/barrel, it becomes increasingly difficult for shale oil producers to make a profit. But the surge downward in oil prices is largely dependent upon American shale oil production. A "cost of production" factor really dominates here. America is producing more and more crude oil, but is on a somewhat slippery slope as shale producers are beginning to cut back. It might be possible for crude oil prices to continue to hover in and about where they are now for time to work off inventories, but there does appear to be some kind of a "floor" which many are not recognizing. Any type of Middle East international incident could set off a situation emphasizing how tightening world supplies could affect the U.S. It is true greater and greater percentages of electric power production are shifting to renewable energy sources, solar and wind, but we are a long way from "energy independence" without shale oil production.

Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:

Parabolic Chart

September Crude Oil:

Parabolic Chart

Nirvana Chart

September Crude Oil:

Initial Chart

News Analysis

As of this writing, reports that Syria may be preparing another chemical weapons attack is increasing Middle East tensions which could raise the price of crude oil. Recent better-than-expected economic data in the U.S., China, and France is also supportive for crude oil. These reports tend to remove deflationary fears. Mediterranean crude oil imports jumped to 42.2 million barrels during the previous week, the highest important level there since early May. Those imports were largely from Libya. U.S. crude oil inventories are expected to moderately decline in the coming weeks. But the most recent weekly API Report showed an increase of 851,000 barrels instead of an anticipated decline of 2-3 million barrels.

Venezuela's largest refinery is planning to operate at less than 50% capacity next month as it goes partially down for maintenance. Seasonal demand for products is expected to improve. There has been a sizeable build in gasoline inventories in the U.S.

Storm disruptions in the Gulf of Mexico (Tropical Storm Cindy) in the past week contributed to a fall of 100,000 barrels per day in U.S. crude oil output. Total domestic crude production is at 9.25 million barrels per day in the latest report.

Sentiment remains that the crude oil market is oversupplied with OPEC members reluctant to frther curb production. Having pledged to do "whatever it takes" to support prices, OPEC still faces ever-rising stocks and a hesitancy from producers for deeper cuts.

So the situation now is with a tiny crude oil inventory build and a small draw in gasoline stocks which still remain above the average seasonal upper limit. Driving season has failed to live up to expectations of stockpile draws. The active rig count in the U.S. increased last week for the 23rd week in a row. That supports a theory that OPEC production cuts are but a window of opportunity for U.S. shale at current or even lower prices.

A contagion of oil price drops to around $30 to $35 per barrel could cause debt-to-enterprise values to jump to over 55% for a lot of high-yield energy concerns. Deutsche Bank analiysts report that we are getting dangerously close to where oil weakness could be a cause for credit-loss concerns in the energy or the broader higher-yield securities markets. $35 appears to be a trigger point for this.

Some believe the latest downturn in energy markets around the world is not just a problem for the high-yield markets, but perhaps an indicator of an upcoming economic recession.

Shale came back strongly in recent weeks, but it is questioned whether or not it can survive sub-$45 oil. The shale industryi has locked in its 2018 production with hedges at a much lower rate than it did at this point last year. The lower rate of hedging will expose shale drillers to low prices going forward.

Increasing talk of sanctions on Russia threaten development of Russian energy export pipelines to Europe. Company stocks of Royal Dutch Shell sank on this prospect as it is involved in the development of such pipelines. Renewables are making faster and faster inroads into sources formerly using oil. As this happens much faster-than-expected, with some projections showing wind and solar accounting for half of all global electricity production by 2040.

Our interpretation of this news is that current oil prices are unsustainable in the long run because oil prices are below the marginal cost for sale producers of around $50/barrel. A dip in U.S. shale producer output is the key to higher oil prices. A ramp up in shale oil output in the past year reduced U.S. oil imports and offset production by OPEC producers and Russia to leave oil prices wallowing near their lowest point since November. Therefore, based upon cost of production, we interpret the news as positive for oil prices.

Point & Figure Chart

 60.0I                                                                  R  6/28
     I NYM - Sep-17 Crude Oil, 1000 bbl, $/bbl     Cm.=0.03  Lim.= 1.6
     I                        XO  X
     I                        XO  XO
     I                        XO  XO
     I                        XO  XOX
     I  X   X                 XOX XOXO
     I  XO  XO                 OXOXOXOX     X   X
     I  XOX XO              X  OXOXOXOXO  X XO  XOX
     IX XOXO O            XOXOXOX    OXOXOXOXOXO   O
     IX XO   O            XOXOXOX    OXOXO O OX    O      X
     IXO     O            XO OXO     OXOX    OX    O      XO
     IX      O            X                  O     O      XO
     IX      O            X                        O      XO
     IX      O            X                        O      XO
     IX      O        X   X                        O      XO
     IX      O        XO  X                        O      XO
     IX      O      X XO  X                        O      XO      X
     I       O      XOXO  X                        OX     XO      XO
     I       O      XOXO  X                        OXO    XO      XO
     I       O      X  OXOX                        O OXO  XO      XO
     I       O    X X  OXOX                          OXO  XO      XOX
     I       O    XOX  OXOX                          OXO  XOX   X XOXO
     I       O  X XOX  OXOX                          OXO  XOXO  XOXOXO
     I       OX XOXOX  OXOX                          O OX XO O  XOXOXOX
     I       OXOXOXO   O OX                            OXOX  O  XO O OXO
     I       OXOXOX      O                             OXOX  O  X    OXO
     I       OXOXOX                                    O O   O  X    O O
     I         OXOX                                          O  X      O
     I         O OX                                          OX X      O
     I           OX                                          OXOX      O
     I           OX                                          OXOX      OX
     I                                                       OX        OXO
     I                                                       OX        O O
     I                                                       OX          O
     I                                                       OX          O
     I                                                       O           OX
     I                                                                   OX
     I                                                                   OX
     I                                                                   OX
     I                                                                   OX
     I                                                                   OX
     I                                                                   OX
     I                                                                   O
Our computer tells us a non-conventional reactive approach works best for crude oil on p&f charts. Therefore the above chart is taken as giving a buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and are in a seasonal down period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "LSS3Day." It is giving a buy signal.

Internal Printout 1

Results of "LSS3Day" for Crude Oil (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system is working on a longer term buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $!,000. Initial margin on a single contract is $3,026. Use of options is advised.

Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Commercials with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to up is imminent near a volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Crude Oil October 44 Put and Sell (1) Crude Oil October 47 Put @ 1.49 to the sell side or greater.

o 1 o 2 o 3 0 4 o 5

Calendar Spread

What the Sep. - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. This disagrees with our longer-term ultimate conclusion in this article. The best time to enter or leave the above spread is when it is at -0.40 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -0.81 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be at the sell the far, buy the near point. This agrees with our shorter-term conclusion.

Level Table:

Level Table

The path of least resistance is down.
 61.0|                                                                  R  6/29
 NYM - Sep-17 Crude Oil, 1000 bbl, $/bbl     Cm.=0.03  Lim.= 1.6
     |CCWZZZZ[[   <<<
 38.5|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO=-0.158
                     1 1 1 1 1 1                                      
       7 7 7 8 8 9 9 0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 5 6 6           6
       0 1 2 1 2 1 2 1 2 0 2 0 2 0 2 0 1 0 2 0 1 0 1 3 1 2           2
       1 5 9 2 6 2 6 0 4 7 1 6 0 5 0 3 7 6 0 3 8 2 6 1 4 8           9

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 6/26 ).

Intraday Chart

                 Risk Versus Opportunity Report

                  CLU7    September Crude Oil

                      High Price:  50.06
                   Current Price:  45.2
                       Low Price:  42.83

                            Risk:  0.102
                     Opportunity:  0.209

                    (O/R) Ratio =  2.051

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart + 1
Nirvana Chart + 1
News + 1
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 0
Third System + 1
Historic Range + 1
Commitment of Traders + 1
Range/Volatility + 1
Level Table - 1
Other Factors - 1
Total + 8
Place 4 September Crude Oil on a Buy Watch with stoploss @ -4.00 below the get-in point when recent price is represented as "45.19".