Crude oil prices are getting annihilated

  • Crude oil prices are tanking, registering the largest one-day percentage fall in nearly three years on Tuesday.
  • Both Brent and WTI futures have now fallen around 25% from the recent cyclical highs struck in early October.
  • Australian motorists should expect to see sharply lower petrol prices in the next two to three weeks.

Crude oil prices are tanking, registering the largest one-day percentage fall in nearly three years on Tuesday.

Front-month Brent crude futures — the global benchmark — have tumbled 7% to $US65.19 a barrel, the largest percentage decline since February 2016.

Brent Crude Front-Month Futures Contract Daily Chart.

WTI futures were hit even harder than Brent, tumbling 7.8% to $US55.24 a barrel.

The latest slide — extending the falls in both contracts to around 25% from the recent cyclical highs struck in late October — was sparked by a warning from OPEC about the outlook for global demand.

“OPEC lowered its global oil demand forecast by 70,000 barrels per day (b/d) in its latest monthly report,” said strategists at ANZ Bank.

“It said doubts on emerging market demand would see growth in world demand for crude fall to 1.29mb/d in 2019. As a consequence, the appetite for its crude would be about 31.5mb/d, which is about 500kb/d lower than its forecast of only two months ago.

“This was enough for systematic traders to add to their shorts, while macro investors liquidated their long positions.”

Photo by David McNew/Getty Images

‘Catch a falling knife’

While OPEC’s warning over the demand outlook, on top of Saudi Arabia’s decision to reduce crude output by 500,000 barrels per day in December, suggests OPEC may strike a deal to cut output when the cartel meets in early December, Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, says finding a broader agreement may not be that simple.

“Saudi Arabia’s timing suggests that the kingdom is looking for a deal to sideline supply by OPEC’s next official meeting on 6 December. Though any output cut by Saudi Arabia will require participation from other allied nations, and that could be an uphill battle,” he says.

“Russia, the world’s largest oil producer, is perhaps the largest obstacle to a Saudi-led deal successfully being negotiated.

“Russia has said that it would rather wait and see, instead of making a ‘hasty’ decision to change OPEC’s production strategy.”

Dhar says that given the plunge in crude oil prices since the start of November, “any hint of a deal should help oil prices higher”.

Greg McKenna, an independent strategist and trader, says WTI futures, in particular, are “at a critical juncture here in the low $US55 region” from a technical perspective.

“This is ‘catch-a-falling-knife’ territory and the previous top is now support, and WTI is also at the last line of defence, the 61.8% retracement of the big rally from last year,” he says.

“If that breaks we are looking at $US50/$52 and maybe even $US42/45.”

Regardless of where prices move from here, given the scale of recent declines, motorists should expect to see sharper lower prices at the petrol pump within the next two to three weeks.

That’ll be some welcome reprieve for stretched household budgets, even if temporary in nature.