On Friday, oil prices plummeted by 10% and the raw material marked its worst day in the last 5 years after OPEC and their off-cartel partners led by Russia failed to reach an agreement to cut production. But that was not all. Over the weekend, Saudi Arabia announced that it would increase production to levels well above 10 million barrels per day from next month. At the same time, state-owned giant Saudi Aramco has announced that they are reducing their official sales prices for April.

The price of Arab light crude oil for the US will be trading at a discount of 3.75 USD per barrel, which is 7 USD per barrel, while the Brent price for Northwest Europe at a discount of 10.25 USD per barrel

And so it came to a crisis moment early in the new week.

On Monday, WTI crude oil prices opened at 32.52 USD per barrel, down by 25% from Friday’s close levels. Thus, the WTI registered its largest decline since 1991. In addition, the price continued to fall and hit 27.29 USD, its lowest value since September 2003.

The situation with Brent variety was similar.

Oil prices have been under pressure since the start of the coronavirus epidemic, amid fears of a slowdown in raw material demand. On Monday, the two crude oil benchmarks, WTI and Brent, are now down 45% and 47%, respectively, which leaves them deep in the bear market.

According to the analysts’ estimates, after oil dropped nearly 30%, OPEC members lost revenue of about 500 million USD in just one day. For most members of the Organization of the Petroleum Exporting Countries (OPEC), crude oil is the first source of income and the collapse of prices is a serious burden on their economies.

“Crude oil has become a bigger problem for the coronavirus markets”, said Adam Crisafulli, founder of Viral Knowledge. “It will be virtually impossible for the S&P 500 to jump steadily if oil continues to sink”, added he.

Stock markets

Almost all stock markets in the world have been affected by the coronavirus epidemic that has unfolded in recent weeks. Demand for risky assets declined sharply, leading to a correction for most stock indices.

The collapse in oil prices further suppresses the already risky appetite in financial markets. The major world indices registered an extremely weak start of the week and continued their corrective movements.

In both Asia, Europe, and the United States, major indices declined by about 5% or more. The worst-hit appears to be the Italian FTSE Mib index, which by noon had wiped out more than 10% of its value. It was followed by the Australian S&P / ASX 200, which collapsed by over 8%.

Following these downturns, many of the major indicators are already on the bear market (down more than 20% from the last high). DAX 30, CAC 40, Euro Stoxx 50, FTSE Mib and Nikkei 225 are now technically in the bear market.

What next?

“Starting April 1, we are starting to work without complying with the quotas and reductions that were introduced earlier”, said the Russian Energy Minister Alexander Novak after the OPEC+ meeting. Novak added: “But that does not mean that every country will not monitor and analyze market developments”.

Morgan Stanley already estimates a Brent price of 35 USD per barrel in the second quarter of 2020, and a WTI price below 30 USD. The bank’s previous forecast was Brent at 57.50 USD per barrel and WTI at 52.50 USD per barrel.

But other analysts are even more subtle.

“Approximately 20 USD oil price in 2020”, forecasted Ali Khedery, a former senior advisor to Exxon Middle East and now the chief executive of US strategic company Dragoman Ventures.

At the same time, markets are already expecting the Fed to bring interest rates down to the 0-0.25% range by the March 18th meeting of US central bankers, according to CME Group’s FedWatch tool.

Interest reductions can support stock markets, although market players are largely focused on developing the coronavirus epidemic.

Can we see a return on risk appetite and a rise in stock prices and oil, or does the collapse of “black gold” continue and the correction in stock market indices will continue? How will you trade?

How to trade oil?

One of the most commonly practiced methods of investing and trading in oil are: oil futures, investing in shares of oil companies, Exchange-traded funds (ETFs), and trading in oil contracts.

A futures contract is a legal agreement to buy or sell an asset at a predetermined price at a fixed time in the future. From a commercial point of view, the trader has little interest in obtaining the asset itself (typically 1,000 barrels of oil), but simply trades the contract itself for a profit.

Keep in mind that when trading oil futures, traders do not have to invest the full value of the contract (55 USD x 1000 barrels of oil). Instead, they have to make an initial margin payment, which is usually a few thousand dollars.

Another way to invest in oil, ideally profitable when the price goes up, is to invest in the stocks of oil exploration, production, and refining companies. These companies include global oil giants such as BP, Royal Dutch Shell, Exxon Mobil, and Total SA. Also, large players on the market are EOG Resources, ConocoPhillips, Anadarko Petroleum, Occidental Petroleum, and Chevron Corp.

The challenge with this approach is that since you do not invest directly in crude oil itself, the price of the shares of the companies you have purchased may not always reflect changes in the price of oil.

The next option for oil trading is to invest in ETFs, which in turn invest in oil companies. An ETF is an asset that is a basket of other assets (such as stocks) that an investor can choose to invest in or trade. The main advantage of these funds is that they allow the investor to invest or trade in a larger market rather than having to choose individual instruments.

The last option for oil trading, but also one of the most affordable and popular, is the different contracts. Contracts for difference have some major advantages over other oil trading options, and we will now list some of them:

– The ability to trade in the oil markets without having physical barrels of oil

– Opportunity to win both in the rise and fall in the price of oil by opening long and short positions

– Ability to trade in the short term as your transactions are completed in less than a second

– The opportunity to get more profits for your investment – CFDs are a financial derivative with leverage, meaning you can manage a larger amount than what you have deposited into your account

– The ability to trade and invest in a wide range of single-platform markets – professional brokers like Admiral Markets offer CFDs on thousands of financial markets including currencies, stocks, commodities, exchange-traded funds, cryptocurrencies and more.

– Option to trade smaller contracts, which means lower risk (for example, standard oil futures include 1000 barrels of oil, while one standard CFD lot is 100 barrels and 0.1 lots is only 10 barrels).