A ”wild rollercoaster” is perhaps the best way to describe the latest fluctuations in oil prices. Happening against the background of the coronavirus outbreak, a drop in commodity’s demand was worsened by a supply glut. In attempts to save the market, OPEC and its members have been abiding by an agreement to cut production.
All in all, global oil demand has fallen by about 30 per cent as the deadly pandemic has curtailed movement around the world, causing growing oil inventories. As storage facilities filled, prices plummeted steeply. On April 20 a barrel of US Crude oil (WTI) plunged to -$37.63, sliding into negative territory for the first time ever.
So far in 2020, crude futures have slumped over 55 per cent.
In spot prices, however, some upward fluctuations have been recorded in the past two weeks, supported by a modest rebound in demand as some travel restrictions are eased.
The price of a Brent barrel that traded at $70.25 only a few months ago now sits at $30, representing a slip of more than 57 per cent. Over the same period, the price of a WTI barrel has also shed almost 59 per cent, dropping from $63.27 to $26.22.
The recent oil crash was unprecedented in both its swiftness and severity. However, with these rather cheap valuations, many investors are now wondering whether it is a good time to get into the oil market.
Do you also want to add some “black gold” to your portfolio, but not sure how this commodity is set to perform in the next few years? Then this article is for you.
Here, we review the commodity’s recent performance, check the key drivers behind its wild fluctuations and take a look at what the latest oil price forecast for this year and beyond looks like.
The latest oil price trend: what has been happening to the commodity so far in 2020?
The first quarter of 2020 saw the worst performance on record for the market. Oil prices went from over $110 per barrel in June 2014 to around $20 in March 2020.
At the OPEC meeting on March 6, Russia announced it would no longer restrict production. In response, OPEC stated it would increase its oil output. This situation led to an infamous Saudi-Russian price war.
On April 12, OPEC and Russia agreed to lower output to support prices, but this could not stop the market’s freefall. On April 20, a barrel of US crude plummeted to -$37.63, with Brent trading at $26 per barrel. The latter hit rock bottom a few days later, when it fell to $17 per barrel on April 22.
As of May 12, oil has managed to recap some of its earlier losses. At the time of writing, a barrel of Brent crude traded at $30.4, while US crude stood at $25.6.
The entire energy sector has been hurt by lower commodity prices. For example, drilling companies and oilfield service providers are now struggling with decreased demand for their services as production firms have not been able to earn as much revenue due to the low prices.
A plethora of challenges that crude oil is facing today
For years, crude oil has enjoyed its prime status of a robust financial asset, with some investors citing its intrinsic value and often comparing it to that of gold. And while talks about the upcoming end of the oil era have been circulating for quite some time, many remained sceptical. At the end of the day, the commodity’s demand averaged at 98 million barrels per day in 2018, with this figure increasing to 100.1 million barrels per day in 2019. Many expected this number to grow in 2020.
However, recent events proved that the future of the commodity is anything but certain. The outbreak of the new coronavirus has added a major layer of uncertainty to the oil price outlook. According to the International Energy Agency (IEA), in 2020 global oil demand is predicted to contract for the first time since the 2009 global recession.
While the virus is brought under control in China, the number of cases is rising in many other countries. IEA noted in their latest report: “Containment measures imposed in North America, Europe and elsewhere are expected to have a smaller impact on oil demand than those in China. However, demand from the aviation sector will continue to suffer from the contraction in global air travel."
It is worth noting that the deadly disease has only added fuel to the fire of a global oil market that was already facing major challenges. In 2019, demand growth was substantially weaker than expected. In addition, new vehicle efficiency measures have already started to weigh on transport fuels.
Meanwhile, geopolitics remain a wild card on the supply side. Since the start of 2018, production losses from Venezuela, Libya and Iran have reached a total of 3.5 million barrels per day.
In recent years, the increase in refining capacity has outpaced the growth in demand, bringing tough competition for the industry. Even before the Covid-19 outbreak, markets had been oversupplied, with OPEC+ producers having to cut output.
Moreover, global attention on the need to accelerate clean energy transitions in order to mitigate the risks of climate change is growing. With its major emissions footprint, the energy sector is now at the heart of the matter, causing more pain to the already wounded oil market.
With uncertainties over demand and supply, as well as its ability to address the need to improve sustainability and curb emissions, the global oil industry is now facing a plethora of challenges.
Oil price forecast 2020 and beyond: to trade, or not to trade?
The trajectory of recent oil fluctuations has been rather chaotic, with many analysts trying to predict what the market’s next move could be.
According to the oil price projection provided by the US Energy Information Administration (EIA), the prices of Brent Crude will average at $34 per barrel in 2020 and $48 per barrel in 2021. They suggest that in the second quarter of this year the commodity will trade at an average of $23 per barrel but will then surge to $30 per barrel in the second half of 2020. These estimates are much lower compared to those from the last year, where prices were forecast to average at $64 per barrel in 2020.
Market economist at Dailyfx.com Nicholas Cawley wrote in a note on May 6: “Front-month WTI oil futures will continue to be volatile until the storage problem is resolved and traders are confident that if their position expires they will be able to store oil at a reasonable price.”
Cawley added: “With global economic activity unlikely to pick up in the foreseeable future, demand for oil will remain low and the current imbalance against excessive supply will continue to cap any rally in WTI oil futures.”
“The nadir in Covid-19-led demand evisceration was in April at -26.1 million b/d, according to our models,” said Ehsan Khoman, head of MENA research and strategy at MUFG Bank, on May 7. He cited a “de-synchronised recovery now underway as lockdown measures begin to ease — led by a revamping Chinese economy and convalescing transportation demand in developed markets.”
However, he warned: “Oil markets remain oversupplied, and when accounting for shut-ins and voluntary OPEC+ cuts, tallies up to 6.9m b/d of surplus oil produced in May. In the immediate couple of weeks, we still expect significant volatility with more spikes to the downside to front-month oil prices given the sizeable oversupply that has yet to be cleared.”
Meanwhile, Rystad Energy has predicted a much larger surplus of 13 million barrels per day for May, expecting oversupply to continue “well into June”. Rystad’s head of oil markets, Bjornar Tonhaugen, said they see a “slow market recovery coming from June as demand will indeed see a boost and most of the now unused produced oil will find more eager buyers”.
“But June is a few weeks away still,” Tonhaugen cautioned, “and till then prices have to drop further in May before the recovery.”
On the other hand, Goldman Sachs (GS) raised its 2021 Brent oil price projection to $55.63 per barrel from $52.50 earlier. The bank also updated its estimate for US crude to $51.38 a barrel from $48.50 previously.
"Oil production has started to decline quickly from a combination of scale back in activity, shut-ins and core-OPEC/Russia production cuts. Demand is also beginning to recover from a low base, led by a restarting Chinese economy and inﬂecting transportation demand in developed market economies," Goldman Sachs Equity Research said in a note earlier.
According to Walletinvestor.com’s machine analysis, US crude oil is expected to lose in value significantly. Referring to the commodity as a “bad long-term (1-year) investment”, the service predicts the price to fall to $17.69 per barrel at the end of 2020. Here is what their oil price prediction for the next year looks like:
Based on the information provided by another popular online forecasting service, Longforecast.com, US Crude is expected to trade at $27.51 per barrel in December 2020. Here is their US Crude oil prices forecast 2020 – 2022:
According to their Brent oil price analysis and forecast, the commodity is prognosed to close 2020 trading at $38.77 per barrel. The price graph will mainly remain flat during the following years, with oil hiking pass the $50 mark for the first time at the end of 2022.
The bottom line: is oil a good bet?
Besides OPEC+’s efforts to establish supply/demand balance, any continued rallies in oil prices will mainly depend on the speed at which countries reopen their economies and whether they see a second wave of the coronavirus.
Just like with any other investment tool, opening a position in oil is no guarantee of success. The commodity remains a quite risky asset, with its prices expected to wobble continuously. However, while it may not be the best idea to invest all of your money in oil, it can be a great addition to your well-diversified portfolio.
When considering crude oil investing, we recommend you always to make sure to take into account the latest technical analysis, expert opinion and market trends. It is always crucial to arm yourself with as much knowledge as possible in order to build a winning trading strategy.
If you think you are not ready to make long-term investment commitments, but still want to try to profit from the market volatility, you can do so through contracts for difference (CFD). Trading CFDs, you can either take a long or short position, depending on whether you expect the price of oil to rise or fall.
Trade Brent Crude Oil Spot CFD
Are you bearish or bullish on the commodity? What do your future oil price predictions look like?
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