Crude Is getting Slaughtered; At Some Stage It Will Represent Value

  • US crude inventories hurt oil price further.
  • Charts may help in timing a bottom.

Oil Decline Continues After US Data

Brent  has fallen around  51% and WTI about 57% since OPEC met in Vienna on 5 March and since Saudi Arabia and Russia began its damaging price war. Indeed this, with the COVID-19 spread,  was a catalyst which led into the global market sell off. Oil continued its slide today after a report showed a big rise in US inventories, exacerbating the oversupply. US crude inventories rose by 10.5m barrels against a forecast of 4m barrels.

Besides the supply side shock, demand has capitulated as the coronavirus pandemic spread globally. Currently, estimates are of an oversupply of around 25 million bpd.

Charts May Prove Useful In Finding Value

The left chart shows FXCM’s proxy for Brent and the right chart is the proxy for WTI. Both charts are on the monthly timeframe. The indicator at the bottom of each chart is the MACD. The previous declines in oil were after the GFC in 2008 and the period into 2016. The MACD did a good job of turning up from below zero when the commodity represented good value (black verticals). Whilst not a perfect timing tool, one may finesse it, perhaps by looking for upticks in the MACD histogram (shaded gray in the bottom panels). However, it will also be important to assess the fundamentals of the energy sector from both a supply and demand point of view, as both are affecting the drop in price. Currently, pressure remains on price and, as such, we will continue to monitor and update accordingly.