Oil Glut Could Grow To 1 Billion Barrels

Crude oil futures are set to finish the week sharply lower despite a two-day counter-trend rally on Thursday and Friday. The price action suggests that even tremendous levels of monetary and fiscal stimulus from central banks and governments, traders believe the global economy is destined to fall into a coronavirus-driven recession.

Any Gains are Likely to be Temporary

Tumbling demand due to the coronavirus outbreak combined with the collapse of the OPEC+ deal to curb production is expected to bring in a wave of supply starting April 1.

Saudi Arabia, the defacto leader of OPEC, which kicked off a price war with Russia that sent prices plunging, is planning to keep pumping at a record rate of 12.3 million barrels per day (bpd) for months.

"From April 1, about 4 million bpd could flood the markets, potentially pushing down crude oil prices into the teens," Jefferies said in a note. "Unless somebody intervenes, no oil producer benefits from the current environment."

Oil Plunge Sets Off Search for Tanks, Revives Dormant Cushing Storage Trade

Reuters reported on Tuesday that rates to store oil at one of the world's biggest trading hubs are surging, as traders globally scramble to secure space in tanks to cope with slumping demand from the coronavirus outbreak and a flood of supply from the Saudi-Russia price war.

The need for a place to park all that surplus is breathing new life into the market at Cushing, Oklahoma, the nation's hub for trading of billions of dollars of crude a day and the town that bills itself "the pipeline crossroads of the world," Reuters reported.

Analysts estimate the glut could reach more than 1 billion barrels. Some of the excess crude will be absorbed by nations snapping up cheap oil for their strategic reserves, including India and the United States, but that will only mop up some of the supply, Reuters said.

U.S. Officials Looking to Protect Jobs

While lower oil prices are likely to weigh on gasoline prices, which should help the consumer during these difficult times, prolonged lower prices will be devastating to the oil industry. U.S. firms will be forced to shut down production, which will lead to massive layoffs.

In an effort to prevent the shutdown of the U.S. oil industry, U.S. senators on Wednesday upped the pressure on Saudi Arabia and Russia to stop the price war and held talks with the kingdom's envoy to Washington. They urged President Donald Trump to impose an embargo on oil from the two countries.

Trump said on Thursday that he would act on the price war at the appropriate time.

U.S. Seeks $3 Billion to Boost Oil Producers

The Trump administration said Thursday it is seeking $3 billion from Congress to top up the country's strategic petroleum reserves, potentially propping up U.S. oil producers after crude prices crashed globally.

Energy Secretary Dan Brouillette told reporters Thursday the move was about filling up the country's 713.5 million barrel Strategic Petroleum Reserve at a time of cheap oil, not about throwing U.S. oil producers a lifeline in rough markets. The reserves are stashed underground in Texas and Louisiana.

"It's a common-sense move. Everyone who's done any personal investment knows you do your best to buy low and sell high," Brouillette said.

Conclusion

Crude oil prices are likely to continue to drift sideways to lower over the near-term unless Saudi Arabia and Russia call a truce in their price war. Although low gasoline prices are good for the U.S. consumer, low crude oil prices will be devastating to the oil industry and major oil-producing states like Texas and Oklahoma. Both areas are bracing for huge layoffs and economic turmoil.

Continue to trade the trend, but don't get complacent. The market is going down because traders anticipate a flood of oil to hit supply on April 1. Given the current turmoil in the financial markets, you have to be prepared for the unknown, such as the possibility that Saudi Arabia and Russia reach a truce.

If the Saudi's and Russians somehow back away from their threats to increase production then crude oil could snap back $10 to $15 rather quickly. Goldman Sachs said in a research note, supply restraint by core OPEC producers could push up second-quarter Brent prices to $30 a barrel, while U.S. measures to support the market could underpin prices in the near-term.

Technical Analysis

Weekly May WTI Crude Oil Technical Analysis

The technical picture is fairly simple to assess because this market is currently being driven by the downtrend and headlines.

The main trend is down according to the weekly swing chart. A trade through $20.52 will signal a resumption of the downtrend. Taking out this level is likely to drive the market into psychological levels like $20 and $15 per barrel.

Given the history of the crude oil market, anything under $20 should be considered value. I wouldn't call it true support. These are just levels that should be relatively attractive to buyers, compared to what prices were trading just a month ago.

The new short-term range is $54.82 to $20.52. Its retracement zone at $37.67 to $41.72 is resistance. The gap on the weekly chart at $36.70 to $41.20 is also resistance.

These two zones overlap enough to form resistance clusters at $36.70 - $37.67 and $41.20 - $41.72. Since the main trend is down, sellers are likely to come in on a test of these levels.

At this time, we don't have to worry about a change in trend, but short-sellers should watch for a dramatic reversal on both the daily and weekly charts. This chart pattern is likely to be the first pattern to indicate that momentum is getting ready to shift to the upside. It is often said that a closing price reversal bottom indicates the buying is greater than the selling at current price levels.

Closing price reversal bottoms are often triggered by unexpected news. The most bullish news will be the declaration of a truce between Saudi Arabia and Russia, and a possible end to the price war.