Crude oil prices (Brent) just experienced an epic slide as Saudi Arabia started a new price war with a big bang, making today’s crude oil price decline the sharpest one since the Gulf War in the early 1990s.
The demand for crude oil has been declining as the Coronavirus triggered lockdowns of large parts of China, and now Italy, and the risks are still ahead of us with a grown number of cases in the rest of Europe and the USA.
To balance oil prices because of the lower anticipated demand of crude oil, Saudi Arabia pressed for OPEC and Russia to produce less crude oil to reduce about 4% of global supply. However, those conversations failed, and according to Saudi Arabia, Russia said that from April 1, “everyone can produce whatever they like.” Thus Saudi Arabia has pushed away by providing significant discounts to its clients and will increase production.
From next month Saudi Arabia will pump up more oil and also provide a six to eight dollar discount vs. the Brent Crude oil benchmark, hence the sharp drop in crude oil prices.
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At the time of writing, crude oil prices were down by 22% on the day, and the price has still a price gap of 7.9% between today’s highest price and Friday’s close of $45.11. The price was also trading near the 2016 low of $27.01, and far away from the latest high, the February high of $59.9.
The price’s far distance from the February-high and the closeness to the 2016-low places the risk-reward ratio in favor of the bulls. The gap in the price I also favoring the bulls. This alone might not stop the slide in crude oil prices as stock market panic is also feeding into the crude oil price. However, traders that are aware of the risk-reward ratio will probably wait for prices to reach Friday’s close price, or trade near it before turning bearish. The downtrend will remain downwards below Friday’s high of $53.81, and we could have another try of the price to slide below the 2016 low.