Options markets are also turning increasingly bearish on future prices. The difference in the cost of bearish and bullish oil contracts, known at the skew, has moved sharply in favor of falling prices.

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And if all that doesn’t give OPEC enough to think about, there’s also the technical picture. Brent and WTI settled below their 50-day and 100-day moving averages on Wednesday, and fell further toward their 200-day markers on Thursday.

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Harold Hamm, the billionaire shale oilman, said the U.S. industry could “kill” the oil market if it embarks into another spending binge, a rare warning in a business focused on fast growth to compete with OPEC.

The statement, at an energy conference in Houston on Wednesday, comes as top shale companies announce large increases in spending for this year, and the U.S. government says domestic oil output next year will surpass the record high set in 1970.

Shale producers are staging the biggest surge in drilling since 2012, with the number of oil rigs rising to more than 600 this month, nearly double the level of June. They are rushing to spend again after the Organization of Petroleum Exporting Countries and Russia agreed last year to cut its supplies, boosting oil above $50 a barrel after a two-year price rout.

We are witnessing the start of a second wave of U.S. supply growth

Saudi Energy Minister Khalid al-Falih addressed an industry conference in Houston (click here for full transcript). He said he is optimistic about the global oil market in the weeks and months ahead, but “I caution that my optimism should not tip investors into ‘irrational exuberance’ or wishful thinking that OPEC or the Kingdom will underwrite the investments of others at our own expense.”

At the moment it’s a matter of monitoring the markets and conformance of participants, and depending upon our assessment of the first half of the year, we will decide with our partners what to do for the second half

…History has also demonstrated that intervention in response to structural shifts is largely ineffective, and I believe we’ve learned that lesson. That’s why Saudi Arabia does not support OPEC intervening to alleviate the impacts of long-term structural imbalances, as opposed to addressing short-term aberrations such as financial crises, economic recessions, unforeseen supply disruptions, or the like

OPEC data for January show that compliance among non-OPEC suppliers was only 40 percent of their agreement, and Russia and Mexico accounted for 92 percent of those cuts, which were expected anyway, due to seasonality and “natural decline.” The other nine non-OPEC countries cut only 18,000 b/d in total. In other words, non-OPEC producers did next to nothing. The non-compliance of non-OPEC countries could gut a rollover.

The Saudi energy minister may be casting doubt about a roll-over so the non-OPEC partners do not take it for granted, as a means for attaining greater compliance from them. He might also want to create risk for American shale companies so they do not ramp-up production so fast.

The Middle East producer cut the pricing for some of its April oil sales to Asia, surprising customers who were expecting an increase that was signaled by the structure of the market. That shows it’s trying to lure buyers toward its lighter and less sulfurous crude varieties at a time when similar-quality grades are rushing to the region from the Americas, Europe and Africa.

With its latest pricing, the premium of one of Saudi Arabia’s lightest grades to its heaviest has shrunk to the smallest since July 2015. This is the producer’s latest effort to defend sales in Asia — a region that’s already largely spared from its output curbs — as Middle East prices strengthen and make supply from elsewhere relatively cheaper.

West African producers last month were expected to send the most crude to Asia in at least five years while unprecedented flows of North Sea oil were bound east earlier this year.

The Saudis are “facing more competition at the light barrels side,” said Peter Lee, an analyst at BMI Research. “Because they’re already cutting production from the medium to heavy barrels side, the Saudis would hate to lose further market share in the light side of things

OPEC compliance has reportedly been strong, but it remains to be seen whether it will be enough to meaningfully reduce abnormally high inventories. The exclusion of Libya and Nigeria and a poor record of adherence by some members makes us sceptical that the arrangement will be sustainable in the longer term.

At the same time, US rig counts have nearly doubled from their lows in May 2016, which has contributed to a rebound in US crude production to over 9mmbbl/d. We expect this upswing in production to continue throughout 2017 due to the rise in rig activity, increased capex budgets, and the roughly two- to four-month lag between spudding shale wells and production.

Our 2017 base case Brent price assumption has been raised to USD52.50/bbl from USD45/bbl and we continue to assume prices of USD55/bbl in 2018, USD60/bbl in 2019 and USD65/bbl in the long term. Our 2017 WTI price assumption was raised to USD50/bbl from USD45/bbl and our assumed 2018, 2019, and long-term prices were all adjusted lower by USD2.50/bbl to reflect the re-established Brent-WTI spread.

The first warning shot across the bow is that the price of crude has remained around the $53 level for almost 3 months now. However when you take into account the divergence from energy stocks, the length of the current intermediate cycle and long term sentiment dropping from elevated levels, I think it is only a matter of time before price follows sentiment down which would mean a break of $50 per barrel in the near term.

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Secondly, intermediate declines in oil usually shave off at least 50% if not 60%+ of the preceding rally. This would mean that crude would retrace to around the $47 to $48 level at least (see below) However (similar to the precious metals complex), the problem at present is if energy stocks break through strong support at their previous November lows ($67.77 on the XLE ETF). As energy stocks have been making higher highs convincingly since the bear market bottom last year, technical traders will definitely bail if this support level gets breached (which looks likely if oil’s intermediate decline is going to be helped by a similar intermediate decline in equities)

The longer the price of crude diverges from sentiment, the sharper the correction will be. The best play now is to let the correction run its course and get long when the set-up presents itself.