Consequences of Falling Crude Oil prices


Is the fossil energy era about to come to its end? Are we about to see energy revolution? Is it the beginning of a new 2008 like financial crisis? Or in short what are the Consequences of Falling Crude Oil prices?

Crude oil prices have been testing $29 per barrel levels, creating a kind of chaos in many (oil exporting ) countries. However, as the famous saying continues every crisis brings an opportunity, thus some of the investment firms are using the most recent crude oil price war as an opportunity to take over firms (buying cheap stocks) or just longing Crude oil. Do I recommend longing oil? Continue reading and you will see…

Currently technically, fundamentally and logically it is quite hard to be optimistic about the crude oil market, mostly due to over-supply and Chinese slowdown concerns, excluding probably corrections. Although, many of the oil price depended countries have started to feel the pain, consequences of falling crude oil prices will get more severe as we head to $25 per barrel.

Current consequences of falling Crude Oil prices

From the mathematical perspective neither the Oil market nor the Oil producing countries can maintain their balances below the $30 per barrel level. It is for me not a question of IF, but a question of WHEN will the Crude oil prices bounce?

Oil Producing Countries suffer:

Saudi Arabia: the oil giant of the world announced that they will be implementing income tax for the first time in their history. The country also announced that the state owned Saudi Aramco would be going public which would be valued as the most valuable public company in the world.

Malaysia: Asia’s only major net oil exporting country is losing 300 million ringgit ($68 million) for every $1 per barrel drop.

Russia: World’s biggest country and Europe’s energy supplier is losing about $2bn in revenues for every dollar fall in the oil price.

Azerbaijan: the oil rich and oil price depended country’s balance sheet got such a hit that the country had to devaluate its currency twice in less than a year creating chaotic inflation inside the country where the daily consumable goods got 50-100% more expensive.

Oil price needed to balance countries' budgets Oil price needed to balance countries’ budgets

Oil companies suffer:

Saudi Aramco: The state owned world’s largest Oil Company produces 12.5 million barrels a day, which means Saudi Aramco used to make well above $1 billion in revenue per day and now need to satisfy their financial needs with $370 million a day. Attention: Saudi Aramco’s production cost per barrel is between $10-$20, thus they can still afford producing crude and make profit even if crude drops t $25 per barrel level.

ConocoPhillips – Texas based American oil producing giant ConocoPhillips is also losing $2 billion per each $10 decline in oil prices.

BP – Western Europe’s oil giant meanwhile has announced to cut 4,000 jobs in its North Sea exploring plans.

SOCAR – Azerbaijan’s State Oil Company could be risking seizing its oil production as its production rate is just around $20 per barrel level.

FOREX opportunities/threats

As Oil prices fall, Oil and Gas companies’ stocks fall giving opportunities for CFD traders, but falling oil prices also creates opportunity for Forex traders.

  • USDCAD – the pair keeps on breaking level after level, at the moment we are looking for two possible reversal levels: 1.4601 and 1.4717
  • CADJPY – in times of crisis JPY appreciates, meanwhile Crude oil crises depreciates the CAD. Bearish targets stay intact towards 79.70 and 78.20 levels.
  • AUDCAD – although the Australian Dollar is hit by the stalling Chinese economy, AUDCAD is moving on bullish bias with targets at 1.0225 and 1.0390
  • EURCAD – immediate bullish targets are at 1.6000 and 1.6500 levels
  • CADCHF – the crude oil crisis has hit the CAD at such level that CADCHF’s only visible support is at the lowest low of 15 January CHF Black Swan Event at 0.6790 zone

My Crude Oil Expectations

We are likely to see the following actions in Crude oil market may the Crude prices continue at its current levels:

  • Cut back in investment in new oil fields (BP North Sea Operations, US and Canada Shale Operations, etc…)
  • Oil Producing Company’s bankruptcies
  • Further falls in Oil and Gas companies’ stock prices
  • Further job cuts from Oil and Gas companies as well as government sector in Oil Producing Countries
  • Deflation: trouble for central banks (ECB, FED, BOE) globally
  • Potential Crude Oil Black Swan Event *
  • Alternative energy revolution **

Crude Oil Black Swan Event *

Although nobody seems to talk about the possibility of Crude Oil Black Swan Event, this is probably going to be world changing event. We could expect three types of tide changing events from Crude oil

1- An Oil Producing Country cutting the Production off or refusing to export

A possible shock to the global crude market from a major Oil Producing Country would immediately bring the oil prices right above $50 per barrel. Such a move would put the FX market upside down and destroy the stock market short sellers.

2- Saudi Arabia intervening Rial’s USD peg

Almost all the Oil producing countries had to devaluate their currencies or their currencies depreciated naturally, however the Saudis refuse to lower Rial’s USD peg. A sudden decision on Rial’s USD peg would not only have a major impact on the FX market, but also in Stock Market and other global investment channels supported by the Gulf region. Moreover, such a move would destabilize already unstable Saudi Arabia, hence lead the crude oil to sky rocket.

3- Defaulting Oil Producing Countries

Quite a number of Oil depended countries are at the edge of default. Such an announcement from a leading economy would create a hick-up effect in global financial markets.

Alternative energy revolution **

Lower oil prices make alternative or green energy solutions unattractive as they are rather expensive. May the energy market stay at its current level, alternative energy providers will be forced to find their ways to make their solutions competitive in the market, which can lead to alternative energy revolution.

Crude oil trade ideas

Here is that golden part. Would I recommend any crude oil trade?

It is clear what the fundamentals are telling us, which is based on oversupply and lower demand and that makes the basics of the market economy, thus the reason behind the falling oil prices. However, technical analysis suggest a major likelihood of reversal for WTI crude oil from $28-30 per barrel.

My Crude oil positioning would be the following:

Long WTI Crude oil at $29.50 with a stop at $27.00 and targets at $39.15

What is your opinion? Share your Crude related analysis with me

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