It has been a wild ride for those on the crude oil train this week. It's never good when your stocks are riding pandemic viruses, tweet storms, kingdoms, autocratic leaders and democracies trying to impose volume limits. While crude oil closed up 50% off the lows within a week, it was hardly one for the people of free markets.
With the pandemic wiping out demand, we are in a new world. If oil consumption is going to be restrained due to people staying home and planes not flying, the world will quickly run out of storage.
Under this new reality, the principles of free markets are under pressure. Even with new production limits, it will take a long time to not only reduce production, but to reduce the number of barrels in storage worldwide. So, on a day with crude oil up big, many oil names fell. While the global production agreement may be coming soon, we still will need to curtail the volumes.
The biggest thing is that the downturn is global. This oil issue has to be managed from Nigeria, Iran, Iraq, Kuwait, Australia, Scotland, Norway, Canada, USA, Russia, Saudi Arabia and many other countries.
While crude oil was up 50% on the week, the exploration and production ETF was only up 8.8%.
The price of oil, the volume of oil and who cuts is going to take a little time. After that, low prices stop wells from pumping. Another piece will be bankruptcies in non-state owned companies globally. The last thing is the ongoing decline rates of the reservoir. If no new wells are drilled for a significant period of time, this too shall pass.
I don't know if the lows for the price of oil are in, but there are a lot of reasons to expect the advance a little farther off in the distance. Again, one problem is the overproduction. The second problem is reflating the demand. Care will be required to build some normalcy into the industry. Lastly, oil is a significant source of revenue for many third-world countries. If this does not get repaired sooner than later, this can also cause social unrest, which would be an unwelcome and unhelpful side effect of the COVID-19 pandemic.
Watch oil and oil companies closely. We'll need to get things repaired quickly to restart the global economy.
Greg Schnell, CMT, MFTA
Senior Technical Analyst, StockCharts.com
Author, Stock Charts For Dummies
Want to stay on top of the market's latest intermarket signals?