What a tremendous movement. Within 27 hours the oil price (WTI) falls by a little more than 5 dollars to a low of 57.30 dollars yesterday evening. Currently it has recovered slightly overnight to 58.54 dollars. What happened? And are the following reasons for this crash really serious?
Inventories, the Economic Situation and the Trade War
We already reported yesterday about the initial ignition for this crash. The chart clearly shows the beginning of the oil price crash. It was Wednesday at 10:30 eastern time when oil inventories in the USA were higher than expected. Fuller stocks are putting pressure on the price. But as we wrote yesterday stocks have been rising for months. So pretending that this is a whole new trend is not enough to trigger a 5 dollar crash suddenly.
Traders on the futures market as well as financial media in the USA now bring even more reasons for the strong crash. From Wednesday noon until yesterday evening there was a break in this mini-crash. Then it went down from 61 dollars to 57.30 dollars. In our opinion this second push was a kind of technical sell-off. Finally it has been hit it hard taking a break after months of rising oil prices! But traders and financial media say that in addition to the oil inventories negative economic data from Europe and Japan were also added yesterday. And the bad trade war (all of a sudden?) also stoked yesterday. Yes, yes, all of a sudden we have noticed that the economy could get in trouble. Why could the demand weaken?
Oil price now burned out to the bottom?
In our opinion this is a rather flimsy explanation. Weak economic data has been around for months. The trade war has also been going on for weeks. We continue to believe in a technically driven and maybe also long-overdue strong sale. Some air can be released from the balloon. What will happen next? The following chart shows the WTI oil price since May 15th. The two downward pushes since Wednesday are marked. It is quite possible that the bubble has blown downwards and that the reasons were only given as a pretext for selling off a lot. A new, big, strong attempt at prices above 63 or 65 dollars is possible in the next few days. But of course this is not certain! We cannot stress it often enough. The oil market is and remains unpredictable.
Oil price correction in large picture
The following chart shows the price of oil since August 2018. The price rose from 42 dollars to over 66 dollars. It is understandable that a recovery or a break was necessary. We have been discussing this topic for weeks. Only how long and how big this pause would be was impossible for us to predict. After a slight downward trend since the end of April the price has fallen again since yesterday. Question also on the basis of this chart: Is that the pause? Can the bullish enter again the oil market and speculate on prices above 63 or 65 dollars? Quite possible. But again: The oil market is and remains unpredictable as we could see recently.