Why Oil Dropped Below $40 A Barrel

The oil market faced a selloff last week already, but over the past few days selling in the energy market has intensified, indicating that bears seized the initiative and now entirely dominate the market. In just one week, Brent prices plummeted by 15% and, according to many experts, the decline may continue. In the coming month, Brent quotes may turn out to be at much lower levels and test the $ 35 per barrel support.

What caused such an abrupt change in market sentiment? There are at least two reasons for this.

Market participants believe that fierce selling of hydrocarbons is primarily associated with the Saudi Arabia state oil giant Saudi Aramco’s decision to slash oil prices for October shipments for the United States and Asia. Aramco has cut Arab Light prices for the Asian region by $ 1.40 per barrel, and now this blend is $ 0.50 per barrel cheaper than the Oman/Dubai benchmarks. The decline in prices for Asia was in line with market expectations and was driven by falling prices for Middle Eastern crude and weak refinery margins. Saudi Aramco (SE:2222) also lowered its prices for shipments of Arab Light to northwest Europe by $ 0.20 compared to September shipment. This oil blend is now $ 2 cheaper than the North Sea Brent Crude. Experts note that by creating artificial competitive advantages, Saudi Arabia is trying to stimulate purchases from regional refineries in the face of an apparent drop in demand.

The second reason for oil selloff is associated with the unfulfilled hopes of the world market that China with its consumption volumes would continue to support oil prices in the future. However, after record volumes in June, China's oil imports averaged 11.23 million barrels a day in August, down from 12.13 million barrels a day in July and below a record 12.99 million barrels a day in June. It is obvious that in September and October this indicator will decline even lower, demonstrating a continued decline in demand. Weaker demand may indicate that the economic recovery of the biggest oil consumer has slowed down.

It's worth noting that pressure on crude oil prices could intensify in the coming months, especially if OPEC and its allies soften their supply cuts and production curbs, enforced this spring. A potential easing of OPEC + production restrictions will increase the global oil supply and complicate the process of rebalancing supply and demand even more in the face of a global recession. Considering the above, at the current stage only shorting of Brent looks to be promising. We recommend not to miss this opportunity and open your Sell orders now.