Crude Oil: A Brief History, Analysis & Recommendation

Instrument: WTI Crude Oil
Last closing: 30.93
52 weeks High: 75. 69
52 Weeks Low: 27.31

Energy moves the world and it would be fair to say that crude oil is one of the most important energy sources in today’s world. The world today without the crude oil would not be the same, it powers the industries, provides fuel to shipping and planes and everything else that run the global economic system. Since the 1950’s the crude has taken over the other energy sources like coal and its consumption has reached new levels.

Sometimes referred to as Black Gold, today it is the most traded commodity in the world. It also serves as a major financial instrument used by institutional and individual investors for portfolio diversification, price speculation, and hedge funds.

Since the 1960’s the oil market was largely dominated by the Organization of Petroleum Exporting Countries (OPEC). It included mostly the middle-eastern countries with Saudi Arabia being the largest producer. However in times to come oil was discovered in many other countries in Europe and South America. Due to the extensive oil exploration work in the United States of America, it is now the largest oil producer in the world. Many other countries like Brazil, China, and Russia have also moved up in the list of oil-producing countries.

The Top ten crude oil-producing countries at the moment are the United States of America, Saudi Arabia, Russia, Canada, China, Iraq, Iran, United Arab Emirates, Brazil, and Kuwait.

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Top 10 largest oil-producing countries their production and market share. (Source Bloomberg)

Country Production (Million Barrels) Market Share
United States 17.94 18%
Saudi Arabia 12.42 12%
Russia 11.40 11%
Canada 5.38  5%
China 4.81   5%
Iraq            4.62   5%
Iran 4.46   4%
United Arab Emirates 3.79   4%
Brazil 3.43   3%
Kuwait 2.91   3%

According to Energy Information Administration (EIA), the daily crude oil consumption is 91 million barrels a day which is like to double by the year 2030. EIA also Estimates that in the next 5 years the crude oil consumption will grow due to the increase in population and energy demand by the industry.

Top 10 Countries by Crude oil Consumption (Source Bloomberg)

Rank Country Daily Consumption (Million barrel)
1 United States of America 19.8
2 China 13.26
3 India  4.69
4   Japan  3.98
5   Saudi Arabia  3.91
6   Russia  3.22
7   Brazil  3.017
8   South Korea   2.79
9   Germany   2.44
10   Canada   2.42

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Crude oil’s politics

A commodity as important as crude oil has more factors to its price variation than just supply and demand. A recent standoff between Russia and Saudi Arabia at the Organization of the Petroleum Exporting Countries (OPEC) summit has plummeted oil prices to nearly 4 years low. Saudi Arabia mainly wanted the OPEC to cut production by 1.5 million barrels or 1.5% of world supply, however, Russia which is not a member of OPEC refused the idea. In Return Saudis vowed to flood the market, the spat between the two major oil-producing countries and the threat of Coronavirus slowing down the global economy brought the biggest single-day drop in decades.

Politics over Crude Oil is complicated, whether it is the 1973 oil crises in which the oil prices rose by almost 400 percent or the recent Saudi-Russian tussle that in contrary to 1973 has resulted in a lower price. Crude oil price movements always bring new challenges with it. For the non-oil producing countries, low oil prices mean a cut in import bills. However, at the same time, the oil-producing countries start to face a decline in their revenues.

The Present Market Situation

After a huge single-day drop the crude oil price seems to find major support near $30 a barrel. This major support was formed back in February 2016 when the price had fallen to almost same the level. However, the real threat comes from an economic slow due to coronavirus which is now declared a pandemic by the World Health Organization (WHO). Since the coronavirus outbreak, the Chinese exports have plummeted by 17%, other countries like South Korea, Japan, and Italy are facing a similar situation with the economy.

The real question at the moment is whether the crude oil price will fall further? Fundamentally, if not all, most of the oil-producing countries have a higher production cost than the current price levels therefore such low prices may not sustain for a longer period. The oil-producing countries will likely get together and cut production to tighten the supplies.

From a technical point of few, the oil has stronger support near the current $30 level. Back in 2016 when the price had fallen to $30 a barrel, it nearly took 6 weeks the price to recover above $40. In a scenario where coronavirus is contained sooner than later the oil price is likely to recovery sharply however if that does not happen the price is likely to remain in mid 30 dollars range for a bit longer period before bouncing above $40. The chances of price to stay below $30 for a long period are slim.

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The Present Support and Resistance Levels and Trading Trading Strategy

Support 1:  29.80 – Support 2: 27.75 – Support 3: 26.40

Resistance 1: 31.32 – Resistance 2: 33.70 – Resistance 3: 34.80

Day Trades: Buy near $30 with a stop just below support 1 that is 29.50 and with a take profit at 31.10 just before the resistance 1.

A spike towards $38 in a really short time would also create a selling opportunity. In such a scenario traders may opt to sell near or above $38 with a tight stop loss above $40, the ideal take profit will be near $34.

Be advised that a weekly closing above $40 will indicate a short term trend reversal towards $48.

Medium & Long term: On the medium-term base the market is expected to remain range-bound between $29 and $38. An entry near $30 with a target of $38 would be ideal, the holding period may exceed 3 weeks. Relatively long term investors may hold their long position taken in $30 range with a quarterly target of $45.

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