How much lower can oil prices go?

Oil prices continue to scrape the bottom of the barrel, with WTI (US) Crude price languishing below US$30 a barrel and Brent Crude just slightly above that at US$31.10 a barrel.

This is oil’s lowest price level since April 2004.

On Monday 16 March, WTI and Brent both plummeted as much as 12.98% and 14.01% respectively from the previous week’s closing, based on IG trading data.

Markets plunge following the US government’s coronavirus response

The huge drops came after the US Federal Reserve revealed in an emergency press conference on Sunday 15 March that it would be implementing several fiscal measures to combat the economic fallout caused by the coronavirus pandemic.

These include slashing interest rates by 100 basis points to a range of 0% to 0.25%, the lowest level since 2015. This cut follows a half percentage point rate reduction already rolled out on 03 March. The previous target range was 1% to 1.25%.

In a bid to control longer-term debts and boost a slumping housing market, the US central bank also announced a US$700 billion quantitative easing programme centred on buying back and holding more assets.

The stimulus package would be divided into the purchase of US$500 billion of US treasuries and US$200 billion of mortgage-backed government securities.

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US$700bn quantitative easing programme viewed as ‘inadequate’

While the economic stimulus appears to be a step in the right direction by the US government, markets are not perceiving it that way, according to IG Asia market analyst Pan Jingyi.

On the contrary, as the Dow Jones Industrial Average and S&P 500 index’s massive price drops of 12.93% and 11.98% respectively on Monday show, the financial measures are being received as ‘inadequate’ at best, Pan wrote in a client note.

She had posited that the Fed’s emergency move had in fact triggered ‘fresh concerns’ on the back of the ‘fear that the central banks’ support may not be enough to cushion the impact', which 'had the risk-off mood raging across the market into the start of the week’.

The US$700 billion fiscal stimulus, while sizeable, is below the US$900 billion amount that was first reported last week. The chatter in the markets over the weekend, Pan noted, had been around ‘more substantial support’ on the fiscal front.

‘Although expectation had long been for at least a 75-basis point cut according to market watchers, the urgency displayed with this second emergency cut had perhaps made it different, spelling of the worries on hand,’ she added.

Oil’s troubles rooted in Saudi-Russian price war

Like equities, oil is also considered a risk-sensitive asset, so any major market reactions – good or bad – can typically send prices fluctuating.

Oil’s troubles are also compounded by the fact that the Saudi Arabia-led Organization of Petroleum Exporting Countries (OPEC) last week entered a price war with on-again, off-again cartel ally Russia.

On Sunday 08 March, oil prices crashed over 30% – the largest one-day drop since 1991 – after Saudi Arabia decided to raise oil production by two million barrels a day and slash prices by between US$6 to US$8 per barrel, in response to Russia’s insistence on keeping present output levels despite falling demand globally due to the coronavirus outbreak.

While things are quiet on both fronts for now, it’s only a matter of time before things escalate again if neither party makes concessions. This will only spell more trouble for oil prices.

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Oil prices retrace slightly (and briefly)

Oil prices have since managed to bounce off Monday morning’s huge decline somewhat, as risk sentiments improved after several countries rolled out restrictions on stock short selling.

With global equity markets collapsing in the last two weeks thanks to the worsening coronavirus outbreak, regulators have been forced to introduce 24-hour short sale bans, in an attempt to prevent any further drops on risk markets.

Since Thursday 12 March – which saw Europe’s main stock benchmark Stoxx 600 suffer its biggest one-day drop since launching in 1998 – several European and Asian countries have banned short selling. They include: UK, Italy, Spain, France, and South Korea.

South Korea took the most drastic measure of the lot, banning short selling for six months.

The short selling restrictions have managed to slow down the equity market’s rapid descend into Global Financial Crisis levels – the Stoxx fell 4.7% on Monday against the S&P 500’s and Dow Jones’ 12% and 13% stumble, even if analysts say these tactics are merely delaying the inevitable.

The shorting restrictions have also briefly rubbed off on other risk-leaning assets, including oil.

Analysts see oil prices going as low as US$20

Goldman Sachs analysts last week said they see oil prices falling to as low as US$20 per barrel this year, with the oil dispute now dominating trading sentiments.

“The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus,” Damien Courvalin, oil strategist at Goldman Sachs, had wrote in a note to clients.

A Reuters poll of 21 commodity brokers posted on Friday 13 March also revealed a consensus price of set US$30.37 a barrel for the second quarter this year and US$37 for the full year.

As at 1pm on 17 March GMT, WTI Crude is trading at US$29.17 a barrel, while Brent Crude is trading at US$30.85 per barrel.

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