Oil prices entered bear market territory yesterday after slumping more than 3.4 percent. The WTI price is down nearly 22 percent from its high of $66.44 which was formed on April 23 this year. Technically speaking, when the price drops 10 percent from its recent high, traders classify this as correction territory, and another 10 percent drop from there makes it bear territory.
Photographer: Andrey Rudakov/Bloomberg
© 2019 Bloomberg Finance LPReasons For the Oil Sell-Off
The sell-off in the oil prices has been mainly due to two main factors:
- Oil glut building up
- Trade war impacting the demand equation
Even though we had many negative headlines on oil prices in the past few days, the gains for the WTI and Brent are standing tall. The year to date gains for WTI is at 9.58% and for Brent, it is 10.88%. Remember during the peak, when the price of WTI touched its $66.44 high and Brent $74.04, these YTD gains were over 30%.
Nonetheless, despite the brutal sell-off yesterday, the WTI oil price is still holding its critical level of $50. For Brent, the critical price point is $60. The supply glut remains the concern here. According to the U.S. petroleum stockpiles data, the supply jumped by 22 million barrels last week touching its highest level since 1990.
Also, the data from nearly half of the global oil consumption countries showed that year-on-year demand growth has halted. Basically, oil glut horrors have started to flash on trader’s dashboards. The below chart shows that U.S. petroleum stockpiles have surged while the WTI crude futures have fallen off the cliff.
WTI price falls off the cliff as the supply glut builds up again.
ThinkMarkets, BloombergHaving said this, both Brent and WTI have attracted bargain hunters and both are trading in a positive territory today. WTI is up 0.23 percent and the Brent price is trading higher by 0.21 percent.
The Bigger Question
The bigger question is if this upward move, which is primarily driven by the bargain hunters, can be sustained? Well, the answer to this question isn’t that simple.
More To Come
The fact is that the effects of the trade war between the U.S. and China were never factored in the oil demand equation. It is only now that we have started to see some of these concerns surfacing in the oil market and sadly, it is only going to get worse because I do not see any light at the end of this tunnel due to the prolonged dispute. Trump is in full nuclear trade war mood; he is picking up wars left and right - Mexico is now a great example of this.
To conclude, it is very likely that if the trade war issues are not resolved we can see the oil market giving up its gains. The key support level for Brent sits at $55 and for the WTI it is $45
https://www.forbes.com/sites/naeemaslam/2019/06/06/oil-in-bear-market-is-now-the-time-to-buy/
2019-06-06 09:51:00Z
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