Does last week's fall in WTI Crude Oil prices mean a recession is nearby?

Updated: May 3, 2020

If you just infer by last week's action then no, it was just some action happening around expiry since in a few hours, the May contract would become void, and June would become the foremost contract.

Imagine a fish seller in the markets and due to some reason, it starts to rain heavily. Everyone stops in sheds and the seller knowing that all his fish stock would be rotten by the end of the day offers fish at half or even cheaper price. Since it rained today, he had to sell at half or lesser price. Does this at all mean that tomorrow as well he will be selling at the same lower price? Obviously not. Now you might say tomorrow again it may rain because of some disturbances so again the prices would be cheap. Well think practically, won't the seller come with ICE packs and everyone with umbrellas the next day? The seller might have to pay some extra upfront money to buy ICE and many people would be buying new umbrellas but raining tomorrow again doesn't mean the markets would be closed or seller would again sell for cheaper rates. He may bring a lesser stock.

Now relate this situation with Oil prices. Like the seller of fish brought lesser stock the next day similarly, OPEC+ deal cut the oil production. The seller lost on Day 1 but he came prepared on Day 2 which added some extra cost on him. Similarly, here also the June contract fell in prices but as soon as the May contracts become void, I'm sure the prices would recover.

After the May contract becomes void and we saw an upsurge in June prices just like the above example.

In spite of the OPEC+ deal to cut production, most of the crude oil was already produced and was outbound to their destinations. Buying ICE in the market takes minutes but cutting production is a practice of weeks. Many barrels are already ready, just not dispatched.

Just like this example, we may see an early decline in the markets but as time progressed on subsequent days, the markets advanced to higher levels.

Technically, the markets were already near key support levels hence not much downfall was expected.

And finally as expected, the fish seller (the market) went right back on track the next day.

He went to the markets bought some ice (i.e. started with net loss) and continued to sell with full potential. In the same way, we saw the markets rebounding from their lows.

#crudeoil #oilcrash #oiltrading

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