Crude oil price dropped again today as investors continued to worry about demand and supply. The price of Brent, the global benchmark declined to a low of $15.98, which is its lowest level since 1999. This price is down by about 40% this week, making it the worst week for crude oil prices in decades.
The drop in Brent crude oil came at time when US oil producers were forced to pay buyers to take the oil as May contracts expired. The main concern in the US is that storage facilities are running out fast in Cushing, Oklahoma. In a statement to the Financial Times, Warren Patterson of ING said:
“The realisation of negative prices has clearly spooked the market, with worries that we could see the same for the WTI June contract and possibly even in the Brent market.”
In the United States, Donald Trump has talked about the need to support oil companies. In a tweet, he asked his energy secretary to come up with a plan that will support these companies. His advisors have devised a number of strategies, including paying oil producers to leave oil in the ground. He has also talked about taxing or even limiting oil imports to the US.
Russia and Saudi Arabia Miscalculation
Lower crude oil prices are not good for many oil exporting countries like Russia and Saudi Arabia especially at a time when coronavirus is ravaging the economy. Indeed, many oil-reliant countries like Nigeria will see real damage since they have higher production costs.
Still, there is a sense that Russia and Saudi are happy because lower prices will cause many shale producers to fail. This has been their goal for years and will likely come to pass this year if oil prices remain this low. Saudi has always rejected that this is their end goal. Just last week, the oil minister laughably said:
“So I have no single doubt in the mind that in the future, they will rise again from the ashes and thrive and prosper. As Saudi Arabia, we wish them well, we look forward to higher demand for oil. I think the market with higher demand will be able to allow shale producers to prosper and thrive.”
The miscalculation is that they believe US will be out of the oil business if shale producers fail. This could be because of ignorance or the fact that they have not read US bankruptcy laws. In reality, if oil companies fail, their assets will be taken over by other companies especially those in private equity. This will see US continue to dominate the energy industry for years.
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Crude Oil Price Technical Outlook
Looking at the monthly chart below, we see that the UKOIL dropped to the lowest level since June 1999. We also see that the price has been declining for the past four consecutive months. Using technical indicators, the price is the most oversold since 2016. As expected, the price is significantly lower than the 100-day and 50-day exponential moving averages.
Therefore, as sentiment remains weak, I expect the price to continue falling to less than $10 per barrel, which will be the lowest level since 1998. In the long-term however, I expect the price to recover as sentiment improves.
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