Crude oil price declined yesterday after a report showed that US inventories rose by more than 10 million barrels in the previous week. This was higher than the previous week’s increase of more than 4 million. In total, crude oil prices declined by more than 50% in March and by more than 60% in the quarter. This makes it the worst month and quarter respectively.
The outlook of crude oil prices is relatively bearish considering that Saudi is achieving what it wanted when oil prices dropped in 2016. The goal of Saudi is to take American shale companies out of business so that it can take market share. With most American companies being incredibly levered and with most debt maturing soon, Saudi hopes that it will achieve its goal now.
Still, there are four main reasons I believe oil prices will recover this month. First, I expect demand to start coming back to the market. It won’t be much, but it will still be demand. Most of this demand will come from China, a country that has started to recover from the pandemic.
Second, I expect the Trump administration to be more forceful with Saudi Arabia, now that the country has ignored the peaceful requests. Fortunately, Trump has tools he can use. He can talk directly to Mohammed Bin Salman or even start placing sanctions on Saudi Arabia. Also, he can withdraw protection the US offers the country. Trump has always favoured low oil prices but he could be irked if he sees some American oil companies go under.
Third, I expect the US to produce less amount of oil this month. Indeed, reports by Baker Hughes show that companies are closing wells. If this continues, the US can remove more than 2 million of barrels from the market.
Fourth, Saudi Arabia does not want extremely low oil prices too. While the country’s leaders have a long-term view, the reality is that very low prices has the ability of making life difficult for Saudis. This would then lead to protests against the monarch as Washington Post noted:
Autocrats in the past sometimes responded to discontent by allowing small increases in democratic participation. But in the aftermath of the 2011 Arab Spring uprisings, Gulf regimes feel too threatened to open up the political realm.
The fifth reason is thar crude oil price is increasingly oversold. Looking at the five-year Brent chart, we see that the RSI has dropped to a low of 17. This is the lowest level since 2014. Meanwhile, the Stochastic oscillator has dropped to the lowest level since 2016. Therefore, there is a likelihood that some buyers will come into the market soon. Still, while I expect more volatility, as evidenced by the Average True Range, there is a likelihood that the price will rise to above $30 a barrel.