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OIL: status update

OIL: status update

Information is not investment advice

Historical views

The chart below shows the 25-year horizon of the WTI price performance. 2002-2003 is when the price was at the current level - $20 per barrel. As such, it’s breaking news. Put in the context, it’s one step away from dropping below $20 to match the severity of the 2008-2009 crisis. Will it be there? No one can say for sure. What are the factors though?

1.png

Source: www.tradingeconomics.com

Chaos

If you type “oil” in any of the major media channels, you will see something like “demand collapse, free-market state, price crash, etc”. That’s how the oil market is now. A shock, in other words. Russia-Saudi Arabia standoff and the dissolution of the OPEC+ sent the global oil industry into a “fire at will” stage. Each oil producer is now bound by no agreement and is free to supply and price as desired. Officially, April 1 will be the first day of this chaos, when the output limits agreed by OPEC+ in December end their term. What to expect?

Quarter gone

The US Energy Information Administration issued its regular report on March 11, 2020 about the prospects for the global oil industry. As you can see, the world’s supply and demand were supposed to meet somewhere above 100mln barrels per day.

2.png

Source: EIA

Note that it was merely three weeks ago, and a week after the failed meeting of OPEC+ on March 5, meaning that the consequences of the disagreement between Russia and Saudi Arabia were already factored in.

Now, only this week the global consumption is expected to drop by 26mln barrels – that is 25%! That means, more than a quarter of the global demand for oil is gone – and that is when Saudi Arabia and Russia are planning to increase their production capacities to record high levels!

Is it the bottom?

How likely oil is to stay at its current decade-long lows if the demand keeps contracting and the supply is set to increase? Actually, in some markets, it already trades at $10 per barrel…

So far, neither Russia nor Saudi Arabia has expressed their will to get back to the negotiation table. In fact, the worse it gets, the more pressing both seem with respect to their chosen policies. Neither does the U. S. seem to be willing to come as the arbiter in this matter. No one to blame, though – everyone is busy saving lives at home.

Art of entry

What to do? Prepare and wait, as usual. A 17-year low may easily drift into a 20-year low and more, given the circumstances and the processes taking place at the moment. Entering the market at the right time may bring immense gains, but it requires precision, and precision requires waiting. Stay with us, then, and wait for the moment.

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