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Crude Oil Bottom Truly Not A Bottom?

When crude oil was stopped by it's 200 month simple moving average in June, I wrote here that this posed a problem for the energy sector.  We analyzed rig counts and even questioned here if the Saudis had it wrong.  I had already posed here that there would be no recovery in 2015 and we should be fearful of the nasty word "deflation" here and it doesn't appear I was wrong.  Who's feeling the most pain from these prices?  We took a look here as these countries could pose good buying opportunities down the road.  What's being said now on crude oil's recent drop in price is even more interesting.....at least until there's a disruption in supply or the Saudi's change their mind.

Back in January, Morgan Stanley drew similarities between the current oil crash and the one in 1986— when oil prices fell 45%.  Though they have been making these parallels for six months, analysts are now saying that the current crash could fare even worse.  "On current trajectory, this downturn could become worse than 1986," Morgan Stanley’s Martijn Rats wrote in a note to clients on Tuesday.

"We have been expecting the current downturn to be as severe as the one in 1986 – the worst for at least 45 years – but not worse than that," Rats wrote. But now with oil rolling over again, it is starting to look like a worst-case scenario could be in play. 

While most of his initial predictions for oil were correct, Rats said the firm underestimated OPEC production so far this year. In February, Rats even predicted a market rebalancing later in 2015.

"We anticipated that OPEC would not cut, but we didn't foresee such a sharp increase," he wrote. "In our view, this is the main reason why the re-balancing of oil markets had not yet gained momentum."

Now, the forward curve of oil prices is suggesting that there will be little recovery in the coming years, as well as an industrial downturn worse than 1986.

Plus, Rats points out that if the oil crash does turn out to be worse than 1986, it will become the worst in at least the last 45 years. This means there will be no precedent for analysts to look at to make sufficient predictions.

"If this were to be the case, there would be nothing in our experience that would be a guide to the next phases of this cycle, especially over the relatively near term," he wrote. "In fact, there may be nothing in analyzable history."

After a few months of stable prices, West Texas Intermediate crude oil re-entered a bear market on Thursday. 


Courtesy of BusinessInsider
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