Ned Davis Research Group ask what it would take to make them bullish on oil. They point out that rallies often await on the other side of super contango, yet they remain bearish on crude oil for the time being.
The Ned Davis report, written by its analysts Warren Pies and John Lyon, concludes that for now the technical evidence remains bearish: “Short, medium and long-term trends are still pointing down… volatility remains elevated… overhead resistance awaits… and sentiment remains depressed.”
Yet the authors note that with spot prices plunging relative to futures, the oil market has entered into a state of “super contango”, where future prices go well above those of spot prices and beyond levels that can be justified by storage and interest rate costs alone. They say super contango has occurred only five times since 1986 (excluding the current case) and in four of these cases oil rallied by more than 10% in the following three months and 25% on average.
In summary, three things must occur before Pies and Lyon become bullish on oil:
- The curve must begin to flatten from a state of super contango (see Chart)
- The 14-day Average True Range needs to revert below 3%
- Oil needs to break and hold above the key secondary downtrend level at $32/bbl
Read the full report.