We are going to see a massive bull run in oil. It might not take place for a few years.
In the meantime, we can expect some more downside. This week was very good compared to the last few. The President tweeted out that he had a talk with the price war combatants and the supply would drop.
Well, that might not be the case.
It appears a meeting with OPEC is delayed and tensions between Russia and Saudi Arabia are flaring.
This is not good news for those who are long oil.
The simple fact is the global economy is collapsing and demand for oil is going with it. Some estimates are that we could have a daily surplus of 20 million barrels per day. This is something that the market cannot withstand.
One of the biggest problems is storage. The on-land storage facilities are rapidly filling up. Even with China building out its reserve capacity the last few years is not going to help much. This leaves tankers as the main storage facility left.
Owners of these fleets know exactly what the score is, thus the price of the tankers is increasing. Many fear that the price of oil will turn negative as storage costs will exceed the price of the oil.
Long-term we could see the commodity, along with others move up. This is likely to happen going into 2023-2024. For those in the oil market, that is a long way down the road.
We are likely going to have to sift through a large amount of bankruptcies. Sections of the oil market were awful before this recent crisis. I cannot imagine that a whole lot of debt did not suddenly turn into junk.
Shorts might have some decent profit potential. The price is just under $30 a barrel. It is not outrageous to believe that oil could find itself in the $10 range. We have yet to see exactly what the financial impact of the coronavirus is on the global economy thus far, let alone a month or two down the road.
What we can conclude is that things are not good and unlikely to get better anytime soon.
With Russia and Saudi Arabia appearing intent on engaging in a massive pricing war, the market is going to remain flooded with oil. There is no way around it. Demand, at best, will come back slowly from this crisis.
In the end, the main question will be who is still standing? This situation is going to get worse and we will see a great many casualties.
Expect a flood of bankruptcies out of the oil sector once the gates start to open.
As always, none of this is financial advice.
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