Oil prices have dropped more than 20 percent from their recent high and the sell-off can become even worse
Oil prices entered in a bear market territory yesterday after slumping more than 3.4 percent. The price is down nearly 22 percent from its high of $66.44 (for WTI) which was formed on the April 23 this year. Technically speaking, when the price drops 10 percent from its recent high, traders classify this as a correction territory and another 10 percent drop from there makes a bear territory.
Reasons For the Oil Sell-Off
The sell-off in the oil prices has been lead mainly due to the two main factors:
- Oil glut building up
- Trade war impacting the demand equation
Despite the fact that we had many negative headline 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 high $66.44 and Brent $74.04, these YTD gains were over 30%.
Nonetheless, despite the brutal sell off yesterday, the WTI oil prices is still holding its critical level of $50. For Brent, the critical price point is $60. Supply glut is a concern here. According to the US petroleum stockpiles data, the supply jumped by 22 million barrels last week touching the 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 dash board. The below chart shows that US petroleum stock piles has surged while the WTI crude futures have fallen off the cliff.
Having said this, both Brent and WTI have attracted bargain hunters and both of them are trading in a positive territory today. The WTI is up 0.23 percent and the Brent prices are 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 sustain? 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 US 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 prolong trade war between the US and China. The fact is that it is only now that we are seeing some of the effects of the trade war in the oil market and Trump is in full nuclear trade war mood; he is picking up wars left and right- the Mexico trade war is 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 all of its gains. The key support level for Brent sits at $55 and for the WTI it is $45