Further Downside Expected For Crude Oil, Ultimate Bottom At $19.80

While Oil found a near-term bottom on January 20, 2016 at $26.19 (just 33 cents off our $25.86 bottom call made on January 1, 2016), and is now approaching a retest of those levels (we are currently sitting at $26.57), we are revising our ultimate bottom call on oil to $19.80 which we believe will materialize near the end of Q1 2016 (late March). The reason for our bottom call revision is our belief that we need to see bankruptcies within the Oil Services sector before any bottom is made. Note at this time, US Oil Producers continue to pump out Oil (even at depressed spot prices) due to the fact that nearly all Oil Services names hold tremendous amount of debt relative to cash, and need to continue to produce any sort of cash flow possible to service that debt. This necessity to continue producing Oil even at very low price levels will remain an overhang on Oil prices (due to continued high supply levels amid weak demand) until cash flows weaken enough to produce bankruptcies and take production off line. Note lower US production is precisely what OPEC wants to see, and we believe this has been the primary driver of OPEC's decision to continue to keep production levels abnormally high amid weak demand. With respect to our timing call, we believe end of Q1 will mark the ultimate bottom for Oil as large institutions will look to dump everything Oil related by quarter end as they will not want clients to see heavy Oil exposure once Q1 statements are sent out. We expect this end of quarter fund divestiture will produce a capitulation type sell-off into the end of Q1 2016 with our model showing supply/demand equilibrium at $19.80. Note on the way down, there is a minor supply/demand equilibrium level at $22 which we believe will produce an oversold technical bounce to $25-26 followed by the ultimate drop below $20. Furthermore, we view any rumor of an OPEC production cut as nothing more than speculative rhetoric which we don't believe will materialize until we see sub $20 on Crude Oil.