Oil prices crash! How low can they go?

• Oil prices tumble after Iran worries prove overstated
• Investor unwind their speculative positions amid abundant supply
• OIL.WTI at the key support but OIL (Brent) still has plenty of room above the support

Oil prices looked scary just few weeks ago but as soon as the $100 talk started the prices just fell off a cliff? What did turn this market around so sharply? Can the OPEC do anything to push prices back higher? How certain currencies may respond to crashing oil price? You’ll find it in our analysis.

3 reasons why oil prices tumbled

The key reason is Iran. Iran used to export around 2.2-2.3mbd of oil before the Nuclear Pact  has been broken and there were concerns that exports could drop to as low as 0.8mbd. However, just before the sanctions kicked in, the US administration granted waivers to 8 countries. Some of them, like China, are required to trim imports but some that have already stopped buying from Iran (Japan, South Korea) are allowed to return to the market. Consequently Iranian exports may not drop much more from the current 1.5mbd.

US granted waivers to some countries so Iranian exports may not fall much more. Source: Bloomberg, XTB Research

The other reason is booming output elsewhere, especially in the US. The monthly data is already showing US output above 11.5mbd, much more than was expected for this year.

Finally, higher US output pushes US oil inventories higher. Do notice that for much of the year the level of inventories was below the 5-year average but has turned above it recently, greatly accelerating price declines.

US oil inventories are back above the 5-year average. Source: Bloomberg, XTB Research

Can the Saudis reverse the market?

One should not underestimate the ability of OPEC to boost oil prices. They showed great discipline in 2016 and 2017 and if Saudis say the Cartel could slash the output by 1.4mbd this needs to be treated seriously. However, this cut will be at least partly just a scale back of increased output in response to anticipated drop of exports from Iran. Moreover there is a vast supply from non-OPEC sources, not just the US but also Brazil, Mexico, Canada and again some OPEC member might be afraid of losing market share. As we saw in 2015 and 2016 it took some time (and further prices declines) before OPEC efforts actually reversed the market.   

Key levels to watch for OIL.WTI, OIL

OIL.WTI is back at the high from mid-2017 because booming US production affects it more than Brent (OIL). This is a very impact level and technically bulls have a chance to regroup here. However the decline was so steep that traders should look for any signs of demand strength before calling it a reversal.

OIL.WTI can use $55 as a support. Source: xStation5

Meanwhile OIL (Brent) is still in the air as it’s back into the previous upwards channel and its lower limit is between supports of $58 and $61.50. With such a huge downward momentum buyers may need a strong support to really have a shot at reversing this market. The nearest resistance is the key $70.50 zone that used to work as a support.

In case of OIL, key supports are still some dollars away. Source: xStation5

Impact of oil prices on currencies

Oil prices have a major impact on the global economy but also on individual economies. In general lower oil prices are seen as positive for the global economy as the major engines of global growth are mostly net oil importers. Furthermore lower oil means lower inflation and thus central banks can maintain lower rates for longer. However, oil producers suffer and prices have an impact on the currencies. Here’s a proxy of how individual currencies are affected by declining oil prices:

Major positive impact: Turkish lira (TRY), South African rand (ZAR)
Minor positive impact: euro (EUR), yen (JPY), Polish zloty (PLN)
Minor negative impact: Brazilian real (BRL), Mexican peso (MXN), Canadian dollar (CAD)
Major negative impact: Norwegian krone (NOK)

Bear in mind that the way that currencies behave depends on many factors, not just oil prices – but these are important as well!