US, WASHINGTON (ORDO NEWS) — Oil traders, trying to navigate in the midst of one of the most serious oil price drops in history, believe that the worst is yet to come.
After falling 60% this year, to the lowest level since 2003, prices will drop to $ 20 per barrel or lower, according to a survey of traders from several of the world’s largest oil companies. Analysts at Goldman Sachs and Citigroup also expect prices to continue to decline in the coming months, and some even speculate that in some regions, prices may drop to negative values, as markets signal a need to reduce supplies.
How low can the price of oil fall?
Oil prices collapsed due to the spread of the Covid-19 epidemic, which, according to some forecasts, could reverse a decade of global demand growth, as well as a sharp increase in shipments resulting from the struggle between Russia and Saudi Arabia for market share. The sudden and sharp drop in oil prices triggered active sales of financial instruments in the markets, and it threatens serious consequences for the economies of Latin America and the Middle East, as well as the economy of the United States, where the energy sector accounts for a significant part of production and debt.
Bottom line trading in the oil market is always a stressful undertaking when oil prices hit new record breaks daily. On Wednesday, March 18, Brent crude fell 13% to $ 24.88 a barrel, the lowest level since May 2003. This month, oil of this brand showed price changes, measured in double-digit percentages, which is comparable to falling oil prices during the Persian Gulf war in January 1991 and the financial crisis in December 2008.
18 out of 20 traders surveyed by Bloomberg believe that the price of Brent crude oil will drop to $ 20 per barrel or even lower, while West Texas Intermediate (WTI) crude oil will be traded another 3-5 dollars less. Such a low price is expected to last from several weeks to the end of the year, traders say.
“A level of $ 20 per barrel can be reached” by mid-April, said R. Ramachandran, director of the Indian oil refinery Bharat Petroleum.
On Friday at 8:34 a.m. in Singapore, Brent crude was trading at $ 28.64 a barrel, maintaining the 14% of the price it won on Thursday after President Donald Trump announced that he could intervene in Russia’s price war and Saudi Arabia.
Some have pointed out that the price of oil has fallen so much that some players start buying fuel to form reserves – a common practice called contango – which could lead to an increase in market supply. However, this will work smoothly until the storage tanks are full. Others believe that prices will continue to decline to a point where producers can no longer make a profit, which will force them to stop production and stop deliveries. Some traders compare the minimum price to the cost of producing US shale oil.
“WTI will fall below the cost of shale oil in the US, which is about $ 20,” said Zhang Chenfeng, an analyst with Shanghai Youlin Investment Management, China‘s hedge fund. “The huge pressure from the contango could lead to lower prices to $ 15, as some traders will need to sell off their stocks.”
Goldman Sachs analysts said this week that the bank is lowering its forecast for the second quarter for Brent crude oil from $ 30 to $ 20 per barrel. They also added that the drop in cash costs would be comparable to the “bear markets” in 1999, 2009 and 2016.
The basic scenario of Citigroup provides for a Brent barrel in the second quarter at an average of $ 17 or less, and the worst case scenario is a drop in oil prices to $ 5 per barrel and even the likelihood of negative real prices in some regions due to lack of storage and transportation capacities . Energy Aspects analysts believe that Brent crude oil may drop to $ 10 a barrel in April, although its price will most likely stay in the region of $ 20 throughout 2020. Mizuho Securities USA analyst Paul Sankey also pointed out the risk of negative prices if shale oil production does not decrease faster than reserves grow, which, from his point of view, is unlikely.
“This is Operation Desert Storm, Enron, September 11, Hurricanes Katrina and Rita, and the Lehman Bros bankruptcy combined,” said Stephen Schork, president of the Schork Group consulting firm. “And we feel the consequences of this combination daily. ”
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