Oil Collapse: Now What?
Wow…
Last week was a whopper for West Texas Intermediate (WTI) crude oil. The essential commodity collapsed to $83 a barrel in last Thursday’s extended hours trading. That’s a 7.7% downturn on the week and the lowest price in nearly two and half years.
Brent crude, which is considered the global benchmark, plunged to $88.50- the lowest price since June 2012.
What the heck is going on?
Quite simply, fear has overtaken these economically sensitive assets.
There’s growing concern the European economy is on the verge of slipping into recession. In fact, the International Monetary Fund (IMF) just cut their 2015 global growth forecast to 3.8% last week. That’s down from their 4% growth forecast released in July.
The IMF blames their lowered outlook on weakness in the Eurozone and several major emerging markets. In their view, Europe has a 38% chance of re-entering a recession in the next six months.
Fearing an onset of weak demand, oil investors are selling now and asking questions later.
But here’s the deal…
The selling in the oil markets has reached panic status.
Rational thinking is no longer part of energy investors’ collective mindset. Instead, it’s who can get out of the oil market the fastest. I wouldn’t be a bit surprised to hear of a few hedge funds closing down due the severe downturn in oil and the margin calls it’s creating.
Investors are likely selling because they have to, not because they want to.
Now I’ll admit, I underestimated just how irrational the oil market would become.
I thought WTI would bottom out around $88 a barrel.
Yet here we are with the commodity trading at the $85 area.
What do you do with this commodity now?
It may take a few days for the dust to settle, but both WTI and Brent are exceptionally oversold and underpriced right now. What’s more, both benchmarks are trading at or near very important technical support levels.
Take a look…
As you can see, Brent is trading at the 2012 low near $90 while WTI is approaching support at $80. Given these support levels, Brent has a high likelihood of being the first benchmark to bounce in coming weeks.
On the other hand, WTI may take a little longer to reverse course and move to higher ground.
Now remember…
Markets are a discounting mechanism. In other words, they discount future information into current prices. As a result, investors are trying to price in a potential global economic downturn into oil prices.
But in my opinion, they’ve grossly overdone it.
And keep in mind, slowing growth projections are just that- projections. There’s a lot global central banks can do to stimulate their economies and avoid recession.
Bottom line…
The selloff in the oil market has become laughable. Patient investors can make a killing by picking up carefully selected oil producers with clean balance sheets!
Until Next Time,
Justin Bennett
Category: Commodities
