Could the World Oil Fall to a Price of $ 20 / Barrel?

Could the World Oil Fall to a Price of $ 20 / Barrel?

Crude oil prices have fallen to below $ 30 per barrel. What happened?What is the potential for further movement?

For world crude oil prices, the price level of $ 20 per barrel is a level that needs attention. The average cost of production per barrel of crude oil based on the production cost of the 20 largest oil producing countries in the world is in the range of that number, to be exact around $ 27. Thus, fundamentally the price of crude oil is difficult to last long under $ 20 per barrel. The question then is: how long and where is the lower limit?

crude oil

Source: UCube by Rystad Energy; Interactive published Nov. 23, 2015

West Texas Intermediate (WTI) has fallen to $ 29.93 per barrel on January 12, 2016. The price is the lowest level since December 2003, which means the lowest in the last 12 years.

Operational Cost Problems

The fall in oil prices due to low demand from developing countries (so that supplies become too abundant) could be a problem for oil companies and they will face operational costs. According to estimates by the Malaysian government, they will experience a loss of 300 million ringgit (about $ 68 million) every drop in the price of crude oil by one dollar. Conoco Phillips loses net income of $ 1.79 million per quarter for every drop in oil prices by 10 USD.

British Petroleum Plc (Britain) has been forced to cut employment with 4,000 workers, Petroleo Brasileiro SA (Brazil) cut its budget plan to $ 98.4 billion from the previous $ 130 billion. Meanwhile Petronas (Malaysia) said it was preparing to face tough years.

The US Energy Information Administration revised its estimate for WTI oil prices in 2016 by 24% to $ 38.54 per barrel. They suggest that oil prices will return to balance in 2017.

Strengthening the USD can also affect oil prices and put prices under $ 30.

The current pressure on world oil prices seems to ignore the statement of the OPEC Secretary General, Abdullah Al-Badri, towards the end of last year. Al-Badri stated that oil prices will not continue to decline and will rise at least in the next few months to a year. This is because the production of non-OPEC countries has decreased to 400-500 thousand barrels per day and in 2016 OPEC will not produce at the current oil price.

Technical View

Technical oil prices are indeed under pressure. For the short to medium term outlook, the bearish bias still dominates crude oil price movements. But for the long-term outlook, it is seen that crude oil prices are currently in the area of ​​long-term technical support, which is in the range of $ 33.20 (the lowest price in 2009) to $ 16.70 (2001 low).Technically, the support area is the right area to open long positions. In other words, the support area – once again technically – is an area that is expected to be able to withstand the rate of price decline and is likely to be followed by a rebound.

Commodity traders who see this opportunity usually try to find technical signals to open long positions for long. Moreover, the stochastic and CCI on the monthly chart have shown oversold indications. It is true that oversold indications will not necessarily be followed by price increases, but a support area that looks to make oversold indications become meaningful.

The potential for a temporary rebound in oil prices is the range of $ 38-40 per barrel as a medium-term target. Technically, it is rather difficult to see a higher rebound for this year, unless oil prices are able to break above $ 40 per barrel. Even if that happens, the next realistic movement target is only up to the range of $ 50-60 per barrel.

But what happens if the oil price continues to fall? It seems that the range of $ 16.70 is temporarily an extreme level that oil prices might reach this year.

Let’s wait and see .

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