Why I'm Bullish on Oil for 2016

i can't disagree more. saudi arabia is pumping more supply than ever to compensate for lower oil prices, iran is set to have sanctions lifted, which in the grand scheme of things isn't high on a % basis but nonetheless more supply, oil inventory data show companies hoarding oil and storing them in tankers given how low spot is, etc

tldr, supply >>> demand. sure, now that we're inside of $30 WTI maybe we don't go much lower from here but to say one's bullish is very hard to comprehend

Enjoy being long crude as the Fed brings the heat this year. Talks of +100bps by year end means a stronger USD and even more bad news for you. If by ''high-quality energy stocks'' you mean international tanker/shipment/logistics firms in the crude industry then I agree with you 100%.

I'm not an o&g guy but I did a platform oil field services acquisition and multiple bolt ons in the early days of fracking so I know the space and I wouldn't touch the sector right now. Outside of some unforeseen geopolitical shock I can't see a big upside to prices so you need to be a bottom feeder with deep and long pockets to take advantage.

Great comments. This remark is not a consensus view. Let me see if I can address a few things:

My claim depends on Saudi Arabia cutting production. Saudi Arabia is a price setter, not a taker, so they aren't compensating for lower prices by producing more, they are producing more to drive the price down. The question is for how long Saudi Arabia will be able to keep prices low to drive rival exporters out of the market. If rising geopolitical tensions in the Middle East and concern about domestic funding force Saudi Arabia to cut production to fund expenditures, you will see a fast and volatile reversal out of the consensus trade. The U.S. oil industry is not tied to public welfare, and shale is more nimble.

Much of the information regarding supply imbalances and Iranian production is already priced in the market. It thus begs the question, how much farther can oil fall, and would the expected profits of taking a short position outweigh a long position. I was waiting to see how the market would react to the most recent events (Iran, U.S. free-trade, etc.). While 2015 was full of market developments, I don't see many other factors changing the oil market in 2016 (though I may not have done enough reading into it yet). With crowded bearish sentiment, now is a good time to take an opposite position.

The same goes with interest rates and currency. Investors might be too crowded in a long dollar trade. A 100bp move this year is also too optimistic in my opinion, and markets will adjust to price in new expectations.

One downside risk I could see is if Iranians supply more than the 500,000 per day that we expect. Another is further deterioration in demand.

To play this view, I suggested going long defensive companies in the industry that are trading at low valuations compared to history, and can do well in a low-price environment or surprise to the upside.

Again, just speculating. Thanks for contributing to the discussion!

Saudi aren't the marginal barrel; how can they be price setters in your opinion? Maybe conflating terms. People were saying the same at 60, 50, 40...

Effectively what you're saying is, how much lower could it go?

janetyellen I hate making macro predictions, just want to add a couple of points:

1. Even if the Saudis reduce production it doesn't mean that will lead to more cash in their pockets and they know that. You have two core fronts they're facing here: a. reduction in production may be fulfilled by another eager competitor (Iranians, Shale) b. I don't think the supply/price ratio is in their favour. I mean for every absolute % reduction in supply there will have to be a higher absolute % increase in price in order to increase cashflow towards their direction. I reckon they're well aware of that, and given their low break-even point in oil production gives them a necessary margin of safety to be reluctant on cutting production as things stand. If they want to cover their trade deficit they still have plenty of reserves and consider opening up their Capital Markets (seems to be the case) to finance that gap.
2. Shale will likely stay alive. The sector may have to consolidate, restructure debts and companies may go bankrupt. The necessary capital equipment, development and knowledge are there, however. There might be new debt-free assets and perhaps with further cost reduction on production (or some type of subsidy) when prices spike up somebody will be able to produce that oil and fill the gap.

I would dare to say that selling puts and calls on oil (short straddle) may seem like a strategy that can work for the next months (no idea what the prices are for calls and puts, though).