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Can Crude Oil Come Back?

Mar 23, 2020

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The last couple of weeks have seen a strong influx of market volatility. As the coronavirus has continued to spread outside of China, it has fueled significant anxiety for investors. That anxiety has been the primary culprit behind selling that has seen major global stock indexes decline sharply and swiftly. In fact, U.S. stock markets were at all-time highs just two weeks ago; they have since declined by over 20 percent to enter bear market territory.

One of the markets that has been hit the hardest is the crude oil market. Not only is oil dealing with the risks associated with the spread of the virus, but it is also having to contend with a possible price war. Oil prices have been under pressure for a while now, but the recent disagreement between Russia and OPEC regarding a production cut sent prices sharply lower overnight for the largest daily decline since the Gulf War in the 90s. With crude oil now trading in the low to mid 20s per barrel, many are wondering if oil prices will ever come back to previous levels.

Market action last Wednesday didn’t help oil’s outlook. On Wednesday, the crude oil market declined by another 24 percent as worries over a recession taking hold drove selling pressure. According to an article from cnn.com, oil is now at the lowest price level since February, 2002. The market cannot, so far, escape the grip of excess supply coupled with dwindling demand. The coronavirus has fueled a collapse in global travel, leaving planes grounded and boats docked. Even manufacturing has been hit hard, and many factories that once used crude oil are now sitting empty.

On top of the virus effects and the potential for a global recession, some major players in the oil industry are playing hardball. Russia recently refused to agree to proposed production cuts in what some have suggested is a way to do away with higher priced U.S. shale producers. Saudi Arabia then made its move, increasing its production levels while cutting prices. In other words, there is currently no balance to the oil market and more declines could be seen before a bottom is found.

While lower crude oil prices are cheered on by many, the decline in oil can have both positive and negative economic effects. On the positive side is the potential for a large decline in the price of gasoline or other products made from crude. On the negative side, however, is the potential for major corporate bankruptcies and layoffs.

While volatility may persist, and for some time, the oil market is likely to see a substantial bounce at some point. The market was near $50 per barrel at the beginning of March and has since declined by over 50 percent. Such rapid declines are often followed by substantial rallies at some point, and a large amount of short covering may exacerbate any temporary upside in oil.

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