Last week West Text Intermediate Crude Oil (WTIC) fell below $80/barrel for the first time in more than two years. While the sell-off has been sharp and powerful there are good indications that the worst is likely over for black gold with the ~$80 price level serving as major support:

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WTIC_Weekly_10.21.2014

 

On an earnings conference call yesterday, Haliburton CEO Dave Lesar stated the following:

"Now before I close, I have to recognize that there is currently a concern about the recent decline in commodity prices. I am not going to predict what the oil price is going to be, but on a longer term we believe industry fundamentals suggest that these lower prices are not sustainable.

While we might be in a slight over supply situation right now, remember demand is still growing. Therefore considering North America and OPEC production expectations, the continued tightness in global spare production capacity and potential geopolitical impacts on non-OPEC production we believe that supply and demand will essentially be back in balance in a relatively short period of time.

Nevertheless, we are keenly aware that there is a risk of a moderation in activity if oil prices remain weak for an extended period of time. What I can tell you is that in recent conversations with our North America customers, we have not received any indication of activity levels slowing as we transition in to 2015.

For example, last week the IEA commented that approximately 98% of North America liquids projects have a breakeven price below $80 per barrel and over 80% work below $60 a barrel. On the international front, the majority of our NOC customers have not indicated that their activity levels will slow down at all." (source: HAL Q3 2014 earnings transcript)

There is some valuable information in there. Dave Lesar's quote combined with the technical structure of the crude chart tells me a few things:

  • It will take a tremendous negative catalyst to push crude prices below major support in the high $70s
  • There is ample supply even at this "new" lower price level
  • The current over supply situation is likely to be corrected shortly through the lower price
  • $80-$85 is likely to be the new price equilibrium for at least the next several months