Oil to trade sideways to lower – Rabobank

Analysts from Rabobank expect sideways to lower oil price action for the balance of this year. According to them, not enough attention has been paid to the “enormous” stockpile of drilled but uncompleted wells (DUCs) amassed in the Permian Basin.

Key Quotes: 

“Little has been said about the enormous stockpile of drilled but uncompleted wells (DUCs) amassed in the Permian Basin over the last number of years. We are not talking about a couple hundred wells here but rather a couple thousands with the latest figures showing an impressive 3,488 DUCs waiting to be tapped. In fact, nowhere else in the world that we know of holds such a vast stockpile of drilled wells that have yet to be completed. This is a huge buffer for crude oil supplies that can be called upon to meet demand needs for months and even years to come and this is in addition to the record amount of crude stockpiles sitting in onshore tanks and offshore tankers.”

“The oil market is still struggling to clear the massive surge of Saudi exports that resulted from the short-lived price and market share war back in April. This dynamic is quite clear from the data which shows a massive spike in Saudis oil exports to the US that have come onshore over the past six to eight weeks. In fact, there is still a large amount of crude oil on the water that is waiting to be cleared.”

“We continue to see limited upside to both flat price and calendar spreads as a result of fundamental and quantitative market pressures. As such, it would not surprise us to see a washout of the out-sized speculative “longs” that have built up in crude oil futures in recent months and specifically in WTI as retail investors continue to flee the space in droves. On the flip side though, we still expect any major dips in crude to be bought as oil still looks attractive on a relative basis to other asset classes and especially given the amount of stimulus flushing through financial markets, a dynamic we expect to remain in place for the foreseeable future.”