Crude Oil fell to $20.37 yesterday – Is now a good time to buy?

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 coronavirus panic around the globe. Both, WTI and Brent are on track to record their worst month in history, down over 54% and 50%, respectively. The continuous global lockdown of worldwide travel due to the closing of borders and general shut down of business activities are influencing the oil prices. Basically, oil prices are being battered from both sides: supply and demand.

Crude oil, WTI, has recovered some of its losses today and it is up over 10%. Investors are asking themselves a question: If this is a good time for them to buy oil given the historic monthly drop in prices of Brent and Crude?

Before I begin to answer the above, 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 the oil supply cut. However, Russia insisted that it was comfortable with the oil price. Russia was determined to buy more time to see the full impact of coronavirus on oil demand. Of course, this was at a time when we were hearing news of coronavirus mainly in China and some cases in other neighboring countries. Europe and the US were seemingly completely immune during that particular time. Subsequently, Saudi Arabia had had enough of the situation and it retaliated; it opened the supply taps. It announced that it would increase its oil production from 9.8 million barrels per day to 12.3 million barrels a day. The oil war was escalated.

 

When the production cut expires?

The OPEC+ plus production cut has been in place since the global supply glut, and it is about to expire at the end of this month. To put things in perspective, at the expiration of the agreement, 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 sitting at its lowest.

 

When is The Next Meeting?

The next official meeting between the two giants, Saudi Arabia and Russia, isn’t scheduled before June. Keep in mind, there is always a possibility of having an emergency meeting, and if one happens before June, it would 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’s analysts took the chopper out and have started to slash their forecast for oil prices. On Tuesday, Goldman Sachs said in its note that they see the oil price averaging $20, which, of course, fell to this level yesterday. The fact is that most of the analysts are comparing the current oil shock with the financial crisis, but the reality is that the long term impact of Coronavirus on the oil demand equation is still mysterious, because it is unknown charted territory.

 

History can provide guidance

In reality, 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 WTI price may fall deep in the defined support zone, and that means the price may fall to $16. 

 

So, is it a good time to buy oil now?

The pandemic continues to slam the demand equation for oil. Given the massive sell-off, I believe the price is likely to see an upward price retracement, something which 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 being at 18 years low. If one dips a toe in this trade, it may not be a bad idea either as one will have a chance to go all-in at a better price if it continues to fall.