Since the start of New Year 2020, crude oil plummeted from $65 to $50.75.
All thanks to the coronavirus, which led to a 20% decline in oil demand.
“Coronavirus represents a real threat to oil demand,” Patrick DeHaan, the head of petroleum analysis at GasBuddy, told ABC News. “We are already looking at a real downturn in demand. You’re looking at thousands of flights being cancelled in China,” he added. “Some of it is certainly rooted in speculation and worry over the continued spread.”
OPEC isn’t helping much either with Russia rejecting a Saudi plan to cut even more production.
Initially, the Saudis supported cutting 800,000 to one million barrels to help balance markets with virus dears. After rejection, the Saudis proposed a compromise of 600,000 barrels. Should Russia agree to the compromise, the output curb from OPEC would jump to 2.3 million barrels.
The Chaos May Have been Priced In…
What we have to also consider is that a good chunk of bad news is priced in. Goldman Sachs for example, notes, there is “only modest further downside potential,” as quoted by Oil Price.
In fact, oil prices have sunk so low, it may be creating a “blood in the streets” opportunity.
Remember, as Baron Rothschild would tell investors, “The time to buy is when there’s blood in the streets, even if the blood is your own.”
Sir John Templeton would tell investors to buy excessive pessimism. Even Warren Buffett still advises that a “climate of fear is your friend when investing; a euphoric world is your enemy.”
Eventually, the coronavirus story will be a distant bad memory. Once that begins to happen, we could see a snap-back recovery in oil. Contrarians are already aware of this potential as oil becomes far too technically oversold.
For example, if you pull up a two-year chart of crude, you’ll see it found support dating back to early 2019. It’s also become severely oversold at its lower Bollinger Band (2,20) with oversold extensions on RSI, MACD, and Williams” %R. From here, we could soon see a bearish gap refill around $58 a share.
Remember, oftentimes fear creates the greatest investment opportunities.
