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Why the oil crash is far from over

by , 29 April 2020
Why the oil crash is far from over
On Monday, while I was doing my weekly market analysis, I saw something I've never seen before.

For the first time in history, the US WTI (West Texas Intermediate) oil prices crashed below zero.

At first, I thought this was just a glitch on my trading platform. But then, just minutes later, it was the breaking news event of the day.

When I did the research, I realised that the demand for oil worldwide has been obliterated. And that we can expect a major further drop in Brent Crude oil's price in the next few weeks.

In fact, I'm about to make my wildest prediction yet on why I expect Brent Crude to drop to a shocking $8.11 a barrel.

Let me explain…

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Negative oil prices hit for the first time in history
The Coronavirus pandemic and the world lockdowns has sent the demand for oil down (almost 1/3rd of the world’s oil demand).
In fact, the world’s demand for fuel has dropped from 100 million barrels a day, when the economy was operating at full capacity, down to just 29 million barrels per day.
As there has been a significant drop in demand for global travel, transportation and economic activity, there is a massive oversupply of physical oil.
In fact, on Monday we saw US WTI crude oil for May futures drop at -$36 (-300%) a barrel.
This tells us that producers were actually willing to pay people to take their oil off their hands as there were hardly any more willing buyers.
All over the world traders and producers are looking for a place to put their unwanted oil. For example, in the North Sea there are vessels which have parked for days with gasoline and jet fuel with no where to go.
Even in Vopak (the world’s largest oil storage firm), is saying they are at maximum capacity.
And President Trump said that his administration would consider blocking oil imports from Saudi Arabia to protect the US shale oil industry.
This over-supply lead to the fall in Brent Crude, as it fell more than 26% down to $18.81. This was the lowest level since 2002.
And with the continued lockdown impact, it looks like it will fall even further.
Brent Crude is set to crash but NOT below 0
I don’t believe for one second we’ll ever see Brent Crude’s price enter a negative territory.
To explain this, we need to understand the difference between WTI oil and Brent Crude futures.
With WTI oil futures, when the contracts expire (30 April 2020) they will be settled with physical barrels of oil.
And so, the majority of investors, traders and market participants will not be able to handle a huge number of cargoes as there is nowhere to store the oil.
In fact, they would have to pay someone just to take the oil off their hands…
Here’s what Rystad, Head of oil markets at Rystad’s Energy, said in a note:
“Essentially, with 108 million barrels worth of contract positions still not closed by the traders in the market, the buyers were rushing for the door to avoid taking physical delivery of crude,”
When it comes to Brent Crude, it’s a whole different story when the contract expires.
When the contracts expire they’ll be settled with cash rather than barrels.
This means, there is no risk of the price going negative, as nobody will pay you to take cash.
But it can still fall quite a bit, which the charts agree…
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Why this Rounding Top will send Brent Crude down to $8.11 per barrel

With the daily chart of Brent Crude, we can see that since the beginning of April it’s formed a Rounding Top (Shaded area).
This is a breakout pattern that resembles a small mountain…
During the formation it formed a low price at $22.27 and a high price at $36.43…
However, as of last week, the price broke below the low price showing that the sellers were outweighing the buyers.
This means, the selling pressure is on and with the demand for oil dropping at a staggering rate, we can expect the price to continue to fall further.
And when I use my High-Low calculation, we can see where the next target for Brent Crude will head.
Price target = Low - (High - Low)
             = $22.27 - ($36.43 - $22.27)
             = $8.11
This means, we can expect the Brent Crude oil’s price to fall another 55% down to $8.11 in the next few weeks.
How I’ll profit from the next oil crash
There are two ways I can profit from the next oil fall.
First I’ll sell (go short) Brent Crude CFDs and hold it until it hit the $8.11 level.
And second, I’ll be looking to short oil companies like Sasol and other resource companies that produce oil through my Red Hot Storm Trader service…
Trade well,
Timon Rossolimos,
Analyst, Red Hot Storm Trader

Why the oil crash is far from over
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