Oil Traders Ask How Low Can It Go?

Crude oil is all the talk of the markets and news headlines this morning. Crude oil is in the red at 45.14 as Brent oil rebounded as traders bought up the cheap commodity as it added 10 cents to trade at 49.72 firmly below the $50 price.  The price of a barrel of Brent crude oil has fallen back to $50, and the CRB index of global commodity prices is at its lowest in a 10 years. Central banks usually ignore the temporary impact of commodity price swings on consumer prices. But they have little room for complacency when inflation and policy rates are already so low.

Whether or not monetary policymakers think falling commodity prices are a problem, there is little they can do to influence them. Chinese growth rates matter far more. So do decisions by producers, be it of iron ore or oil, to ramp up or scale back supply. All Yellen, Draghi and their peers can do is try to cope with the resulting fallout with a very limited range of policy tools.

Yesterday, the Energy Information Administration released its weekly data on oil inventories, which showed that commercial crude inventories fell by 4.4 million barrels to 455.3 million last week. An epic buildup in inventories from January through May added to evidence that prices have been pressured by a supply glut from the shale boom.

Concerns about oversupply in the market have sent oil prices even lower in recent weeks, following the 50% crash of last year. Coupled with weakening demand from China, crude oil has declined with other commodities in a magnitude not seen since 2008.

Bearish traders could see support for crude oil prices at $44 per barrel. The massive supply consensus and slowing demand could drag crude oil prices lower. Prices hit this level in March 2015. In contrast, bullish traders could see resistance at $55 per barrel. Prices hit this mark in July 2015. The falling crude oil inventories and lower crude oil prices might benefit crude oil prices.

The US crude oil price chart suggests that WTI prices could fluctuate between $44 and $50 per barrel in the near term. Crude oil prices might average $50–$60 per barrel over the long term, according to Goldman Sachs’ estimates. The EIA estimates that WTI crude oil prices will average $55 per barrel in 2015 and $62 per barrel in 2016. Goldman Sachs estimated that crude oil prices could hit $45 per barrel by October 2015. However, oversupply concerns and the appreciating dollar have already dragged crude oil prices lower. IHS Energy, a research and consulting group, estimates that WTI prices could even hit $40 per barrel in the short term. Barclay’s analyst Lynden Branigan reported that Brent crude oil prices could hit $50 per barrel and WTI prices could hit $42.03 per barrel in the short term.