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Empirical Models Suggest Higher Prices; Risk Reversal Threat Remains High

Long-term global supply & demand models suggest current oil prices are underperforming historical values. Regression analysis of 6-month average supply-demand differentials versus WTI futures prices since 2005 have oil near $80 per barrel.

An intercommodity model regressing oil prices to correlated commodities also suggests higher prices, although to a lesser extent. As of December 31, 2017, the model estimates WTI futures are $6.60 undervalued, with a target near $67 per barrel.

The threat of risk reversal is high as speculative sentiment remains overbought. NYMEX WTI Managed Money long contracts as a percentage of total Managed Money positions has crossed above 90%. The Hedge Fund Ratio for NYMEX WTI now stands at 10.96, meaning there are almost 11 long positions for every short position. Speculative conditions could place significant downward pressure on oil and products when money managers begin to unwind long positioning.