Brent crude has plunged about 55% from October 2018 high but would still need to fall another 20% to make 75% fall like the previous two occasions. 

Brent crude is now at $34 and down 25% from where we left it on Friday. The oil shock dominated these along with Coronavirus fears.

After the opening on Monday, the crude oil price down nearly 25% first tick traded at $35 later down to 30% and made a low at $31.50 levels to its lowest since March 2016. This was the worst single day fall in nearly three decades.

What happened over the weekend?

Saudi Arabia moved to a price war after OPEC’s production cut agreement failed with Russia on Friday. It seems S.Arabia is preparing the floor to gain significant market share in the longer term.

Lower oil prices have a mixed impact on the individual countries and on the global economy as well. Oil price collapse means it will have a dramatic impact on headline inflation in months ahead as base effects disappear much sooner than previously expected.

  • Paul Donovan at UBS said, “Saudi Arabia has started a price war in the oil market. Oil matters less to the global economy than it did. Oil price moves shift money between oil producers and oil consumers. This price drop should be a net economic benefit to oil consumers.”
  • Warren Patterson and Wenyu Yao at ING said, “This clearly is the start of a price war, and the Saudis were quick to react over the weekend, reducing their April official selling price for crude oil significantly. Arab Light going into Asia was reduced by US$6/bbl MoM to a discount of US$3.10/bbl. Meanwhile, the reductions in Europe were even larger”.

The Global economy is pressing down by Coronavirus risk and lower oil prices. Will the oil price drive further South will be the key question?

Qatar’s former oil minister Al-Attiyah fears price collapse below $20/b, S&P Platts reported.

Goldman Sachs came up with the same price forecast. Over the weekend, Goldman Sachs analyst Damien Courvalin said, “The international benchmark could dip as low as $US20 per barrel and test operational stress levels.”

The oil demand collapses due to the Coronavirus outbreak. Now resistance to cut the supply means mismatch of demand of supply, which is a deadly combo and could lead to credit stress. Back in 2015, we saw the same credit stress after oil prices collapsed over 70%. So far, we saw a drop of $35 or a 55% drop in prices, a further drop of $17 could add the total 75% drop like 2008-2009 and 2012-2015.

If we move back to the technical picture, the longer-term A-B-C corrective structure is pointing to sub-$20 (Monthly chart).

On the Weekly chart, the same pattern suggests $15, its 161.8fe (below chart).

Three levels to focus on: $27 Parallel support, 75% correction suggest $20, and the corrective patterns suggests $17-15 levels. Overall a drop towards $20-15 will be the buying opportunity.

On Monday the price has tested and held the weekly support at $32 its 161.8fe (Daily chart). We expect the price is going to consolidate between $44-31.50/27 levels in the coming days.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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