The Case for a $20 oil

The Case for a $20 oil

The decline in global oil prices continued in this past week. This made a lot of money to oil bears while bulls looking for a reverse in oil prices suffered. Sadly, there is no light at the end of the oil price tunnel. Looking ahead, there is no likely trigger to bring back the oil prices to where they were when the year started.

Early this year, crude oil was trading at near $100 per barrel. Today, it is trading at $35 a barrel. This has led to the suffering of oil dependent economies such as Nigeria and Venezuela. In addition, companies that deal with oil exploration have had to suspend their activities and lay off thousands of workers.

Mid this year, analysts at JP Morgan wrote down a paper where they predicted that the global oil prices would reach the 20s. After this prediction, crude oil which was then trading at $45 a barrel retreated to the lower 60s before taking a dive again. Many watchers in the financial markets would not comprehend of oil prices going down to 20s. Now, it is clear that the future predicted by JP Morgan is very near.

When the saviour refused to act

Last week, the Organization of Petroleum Exporting Countries (OPEC) met in Vienna, Austria to discuss the current situation and come up with a way forward. This was the meeting which could lead to a revival in oil prices. Unfortunately, they refused to act. In the meeting, they left the oil producing countries to regulate themselves. The global financial actors took this as a major boost to the rout in oil prices. After this announcement, the oil prices have lost more than 10% in one week and this is expected to continue.

The idea behind OPEC’s action is that by reducing the oil prices, American fracking companies will not survive in the low price regime. They will therefore be forced to shut down and leave the oil industry. The fracking companies have weathered the storm and inventories in the United States are on the rise.

The future

For oil bulls, the future looks good because it will allow them to buy more when the prices are going south. However, this is a long term view. In the short term however, they must brace for more losses. I base this on a number of reasons. One, OPEC will next meet in June next year. Between now and June, oil production will increase with countries aiming to increase their budgets.

Sadly, even when the OPEC countries meet, there will be more challenges to their production rates. For many years, Iran has been sactioned by the global community because of their nuclear programs. Mid this year, the Iran deal which was signed by many developed countries including USA opened the doors for the country to start importing oil. As at now, the country has millions of barrels ready to export. They will begin doing this immediately the country gets the greenlight from the United Nations nuclear agency. When this happens, it will lead to an increased supply which will lead to further downward pressure.

As stated above, there is no clear indication that the oil prices will start going up again. The few triggers that exist are not as strong as their counterparts. For instance, the ongoing elnino in most countries was expected to reduce production of oil. However, to date, this has not happened and the prices have continued to come down. In March next year, it is expected that oil producing companies will go in their annual maintenance. However, this is a routine activity that will not lead to reduced production.

Way forward

As a day trader, all these happenings should not worry you. In fact, they are opening opportunities that you can use to make money. For instance, you can go short crude and Brent directly. By doing this, you will be making money when the price weakens. Alternatively, you can go short oil companies such as Exxon and Chevron. These companies have no way of making money when the prices are coming down. Last but not least, you can go short oil ETFs. As mentioned above, the entire oil sector is currently nor doing well and so does the ETFs in the sector.