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How long will oil be down?

How long will oil be down?

Information is not investment advice

Oil is the subject of heated debates these days as nobody really knows what to do with the “humiliated” asset. Market traders are scared in the oil markets.

Background

The oil demand declined by 30% because of the coronavirus lockdown. Saudi Arabia and Russia couldn’t agree about the production cut and they started the so-called oil war and supplied as much oil as they want. As a result, the oil glut and reduced demand pushed the oil price deep down.

Only then OPEC+, made a deal to cut 9.7 million a barrel a day, nearly 13% of global production, on May 1 through June. However, it was too little and too late.  

Results

The oil price went below zero by two reasons. Firstly, it was cheaper for producers to pay consumers just to take oil off their hands as they run out of all the storages. Secondly, traders, who hadn’t sold the May futures contract on time, didn’t want a physical delivery of the oil.

The situation is absolutely dire for small shale producers, what corresponds to WTI, while Saudi Arabia and Russia can sustain such low prices. However, the US oil will survive this, but it will take few terrible years for them. US oil producers have started already making deliveries to the nation's emergency stockpile or the strategic petroleum reserve (SPR).

Moreover,  the United States Oil Fund claimed it would get rid of its June oil contracts this week and reduce contracts for next months. Instead, the ETF will buy into longer-term oil contracts.

Forecast

Next time before the expiry of the June contract the oil price will go to zero even faster than it did last time, according to the CEO of the largest tanker company, Nordic American Tanker.

Most analysts believe the oil industry will rebound when the coronavirus pandemic is over. Sooner or later we will see it.

oil.png

On the 4-hour WTI chart we see a strong downtrend. The price reached the 50-day moving average on April 24 at the 17.50 mark and then went down.  Maybe it will touch it again at the 15.15 mark and pull back after that. Resistance line is 20.20. Support line is 10.20.

WTI_OilH4.png

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