Crude and Brent oil are down over 60% year-to-date. Yesterday, crude oil fell 24% to $20.37, touching an 18-year low due to the global panic about Coronavirus. Both WTI and Brent are on track to record their worst month in history, down over 54% and 50% respectively. The global lockdown on worldwide travel and halted business activities continues to influence the oil prices. Basically, oil prices are being battered from both sides, supply and demand.
The crude oil, WTI, recovered some of its losses today and is up over 10%. Investors are asking themselves whether this is a good time to buy oil, given the historic monthly drop in Brent and Crude prices.
Before I answer that, it is important to understand the background.
Who started the war and who escalated it?
When the oil price was trading in the late $40s, Saudi Arabia tried its best to bring Russia to the table to discuss an oil supply cut, but Russia said it was comfortable with the oil price. Russia wanted more time to see the full impact of Coronavirus on oil demand. Of course, this was at a time when Coronavirus was mainly in China with a few cases in the neighboring countries. At the time, Europe and the US were unaffected. The time came when Saudi Arabia decided enough is enough, and it retaliated by opening the supply taps. It announced it would increase its oil production from 9.8 million barrels per day to 12.3 million barrels a day. The oil war escalated.
When the production cut expires?
The OPEC+plus production cut has been in place since the global supply glut, and it is due to expire at the end of this month. To put things in perspective, when the agreement expires, every member of the cartel will be allowed to pump as much oil as they want, and if a new supply cut agreement isn’t put in place before that, it will amplify the supply at a time when the demand is at its lowest.
When is The Next Meeting?
The next official meeting between the two giants, Saudi Arabia and Russia won’t take place until June. Keep in mind, there is always the possibility of an emergency meeting, and if one happens before that, it will likely be about curbing the oil supply so that they can put a floor under the oil price.
Do we know the long-term impact on demand?
Wall Street analysts have taken out the chopper and started to slash their forecast for oil prices. On Tuesday, Goldman Sachs said in its note that they anticipate the oil price averaging $20, which of course fell to this level yesterday. Most of the analysts are comparing the current oil shock with the financial crisis, but the reality is that the actual impact of Coronavirus on the long-term oil demand equation is uncertain because this is unknown territory.
History can provide guidance
In a situation like this, one needs to utilize the wealth of technical analysis to determine a significant support level. Looking at the chart below, it seems like the weekly candle of 11th Nov 2001 provides decent support. I believe that if the sell-off resumes, it is highly likely that the WTI price may fall deep in the defined support zone, and that means the price may fall to $16.
So, it a good time now?
The pandemic situation continues to slam the demand equation for oil. Given the massive sell-off, I believe the price is likely to experience an upward price retracement, something we are experiencing today. However, the current downward trend and the overall sentiment is still way too pessimistic, and this could push the price lower again. Therefore, investors may want to wait a little bit more. Having said this, the price is at its lowest in eighteen years; if one decides to dip their toe in this trade, it may not be a bad idea as there will be the opportunity to go all-in at a better price if it continues to fall.