July 27 What Bears Watching In Oil

(From the desk of First Oil Chat)

With Brent back at $50 a barrel, all eyes are on U.S. crude to see if itll get there too.

Its understandable for oil bulls to crave that milestone for the West Texas Intermediate as it
fundamentally validates everything theyve bet on: OPEC cuts, a visible slowing in shale
production and the disaster-in-making thats Venezuela.

For oil bears too, it makes sense to short U.S. crude at that level as the inevitable spike in
domestic drilling that follows could result in another price implosion and neat profit for those
playing the market on its way down.

Therein lies the boon and bane of $50 WTI.

Even after Wednesdays outsized drawdown data from the U.S. Energy Information
Administration (EIA), few are willing to bet WTI will get and hold on to that magic level by the
third quarter. Most Wall Street banks have less bullish projections for U.S. crude through
September, though a few like Goldman and Citi are maintaining levels above $50 for the year on
average. As of June 30, Goldmans three-month forecast for WTI was $47.50, down from a
previous estimate of $55. Societe-Generale forecasts that U.S. crude will finish the year at just
under $50, averaging $49.45. J.P. Morgan has gone out on a limb to keep its WTI outlook for even
2018 at below $50, citing $42 in a prediction made in June.

Before considering the merits of Thursdays factors, lets reexamine two Goldman equities/oil
notes issued back-to-back in the last 24 hours on the wisdom on $50 WTI.

NO ONE WANTS TO BE CAUGHT FLAT-FOOTED, SAYS GOLDMAN

Energy stocks have led the S&P 500 to record highs, we know. But are the signs of the slowing in
shale enough, asks Wall Streets most influential voice in oil trading. For the bulls, Goldman lays
out the Saudi move to curtail its August crude shipments by 1 million barrels per day compared
to a year ago; the potential reversion in the long-running firm dollar/weak oil play, blockbuster
crude draws this summer; and early signs of incrementally lower capital spending by U.S. energy
firms, with driller Anadarko firing the first shot on Monday with its $300 million capex cut for
2017 (Hess Oil and Sanchez Energy have since announced capex cuts too, while Halliburton said
U.S. drillers were tapping the brakes on output). For good measure, Goldman threw in as well
the potential for flare ups in Nigeria, Libya, Venezuela, which it said created asymmetric upside
oil price risk. Balancing that, it says is the healthy debate on whether the energy sector could
sustainably inflect ahead of a more material shift in capex/activity and the U.S. rig count, dollar
positioning, and relative value in equity /credit. Between the two ends, specialist investors are
staying bearish due to supply concerns and a challenged set up for oil seen in 2018, Goldman
says. These investors are mixed on the near-to-medium term market appetite to buy energy
equities / credit if oil prices need to go lower to trigger a material reaction from U.S. shale
producers, Goldman adds. The abundance of capital has further weighed on sentiment, which
many see as the main driver of oversupply, it says. Recent U.S. inventory draws have been
favorable and suggest the beginning of a rebalance, Goldman says. But WTI has to stay at $50
per or below to effectively constrain shale and restrain OPEC. "We expect supply to ramp in the
second half from shale, and whether OPEC responds to shale growth and Libya/Nigeria's reduced
disruptions by producing more/less/the same will be key for the near-term path of inventories
and front month oil prices," concludes Wall Streets leading voice on energy.

U.S. CRUDE EXPORTS

And now to Thursdays main event

CUSHING INVENTORY DATA AT 10:00 A.M. ET