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Chart of the day: What takes WTI crude to $20 a barrel?

Oil prices have fallen more than 50% this year as global demand plummets and sees oil on track for the biggest contraction in history. Add to that a fierce price war between major oil producers, WTI crude (XTIUSD) continued its downtrend closing at $26.95 per barrel in yesterday’s trading. So what takes oil to $20?

XTIUSD chart

The continued fall comes before Saudi Arabia and Russia ramp up supply early April. Of course markets are anticipating the supply increase, but just how big will the surplus be? The markets could be facing the largest oil surplus in modern history, which would push prices markedly lower. Watching how the surplus ramps up will determine if and how soon WTI crude (XTIUSD) hits $20 a barrel.

Of course, demand is also sinking as countries take unprecedented measures to combat the virus outbreak, stalling demand for air travel which threatens to bankrupt major global airlines.

Falling oil prices, while great for the consumer, are worrying for major companies and often considered a recession barometer. In good times, companies ramp up production to meet increasing demands. Low prices show the oil market rut, which ricochets to the wider economy. Concerns ramp up when you consider that some major companies’ success is tied to higher oil prices. Energy companies like Exxon Mobil (XOM.N) and Chevron (CVX.N) obviously among them.

Low oil prices will be contagious for the financial sector. When prices are high, banks pick up business from energy companies who need financing for new projects. Such projects are too expensive when prices are low. In fact, it’s estimated that around $30 per barrel is when prices become unprofitable for US energy producers.

As oil producers cancel new projects, this also hurts steel and heavy machinery. Companies like Caterpillar (CAT.N), which provide machinery to the industry, will feel the pinch of lower oil prices too.

Separate from the coronavirus pandemic, the price war would be enough on its own to spook financial markets and jeopardise energy producers. Bail out, anyone?

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