Crude oil price declines provide attractive long-term value

Crude prices has started to regain ground after sharp coronavirus declines. Given the historically depressed levels seen last week, is there a case for a more bullish outlook simply based on long-term value?

Crude oil has been on the rise this week, with both Brent and WTI surging higher after a period of declines in the wake of the coronavirus crisis. The reasoning is clear, with Chinese demand likely to fall off a cliff as both businesses and individuals become less mobile in response to the efforts to curb the virus spreading.

After all, Chinese demand made up around 14% of global demand for crude in 2017. Nevertheless, the declines we have seen have taken us into historically depressed levels, with weakness providing potential opportunities for strategic long-term positions.

Crude oil is a natural stabiliser

The beauty of crude is that demand and supply has an element of natural stabilisation as producers react to different prices. The role of the Organization of the Petroleum Exporting Countries (OPEC) certainly does add a more manipulative element to the production outlook, yet the emergence of US production as a force to be reckoned with has helped ensure production is more reactive to prices over recent years.

That means a lower price will price out certain producers, with many halting output or investment which will ultimately lead to lower supply and higher prices. Conversely, higher prices will typically attract greater investment and put producers into maxing out production to capitalise on the high margins.

The recent decline has taken us into the $50.00 mark for WTI, with the price starting to regain ground. What is notable when looking from a historical perspective is that the lower we go, the more of an outlier this decline will appear to be.

For instance, the past 14 years have seen the price start or end the month below the $50.00 mark on just 20% of that time. So less than three years out of 14 have seen the price start or end a month below that level.

The further we fall, the more unusual it is to see prices that low. For instance, just 7% of the monthly candles in the past 14 years saw an open or close below $45.00. Remember, the lower prices go, the more likely we are to see both OPEC and US producers act by trimming back on output.

On the shorter-term time frame, the break through $52.28 provides us with a bullish outlook after a period of downside. That completes a double bottom formation, with the target coming at $55.13.

This recent move also saw the price break through trendline resistance, which ultimately acted as the first tentative sign that momentum could be reversing. Ultimately, the question of whether this is going to be a retracement or bottom remains to be seen, yet further upside does look likely given the huge decline seen throughout January.

Things would look less bullish should we see a break below $51.15. However, if we did see another period of downside to take us back towards the $50.00 or $45.00 region, that would be deemed a great opportunity to look at things from a long-term value perspective and seek out long contacts.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Trade on commodities

Trade commodity futures, as well as 27 commodity markets with no fixed expiries.1

  • Wide range of popular and niche metals, energies and softs
  • Spreads from 0.3 pts on Spot Gold, 2 pts on Spot Silver and 2.8 pts on Oil
  • View continuous charting, backdated for up to five years

1In the case of all DFBs, there is a fixed expiry at some point in the future.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.


Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.