“The worse case scenario would probably be [oil prices] breaking back into the mid-$40s. That would be a pretty hard psychological barrier to cross and we would really need to see a lot of these trade tensions ratchet up,” said Ashley Petersen, a Stratas Advisors senior oil market analyst, on Yahoo Finance’s The First Trade. Petersen said there is around a 50% chance of crude oil spiraling lower to those levels.
“We would really need to see more negative economic data. We have certainly seen signs of it slowing, but it’s not collapsing,” she explained. “Consumer spending is still healthy. We had a solid Memorial Day driving season. The international stockpiles aren’t growing either in terms of gas or jet fuel stocks — so clearly the stuff is being consumed.”
To say the crude oil trade is going against the bulls would be a gross understatement.
Entering bear territory
Crude oil tumbled into a bear market on Wednesday. WTI crude closed at $51.68, marking a stark 22% decline from its highs on April 23. A bear market is defined by a 20% price drop from a high.
The blood-letting — which has obviously extended to oil stocks such as oilfield services play Transocean (RIG) and U.S. Oil Fund ETF (USO) — has come amid escalating trade tensions between the U.S. and China. In turn, economic data across the global manufacturing complex has weakened since the spring and equity prices have tanked from their late-April highs.
Underscoring the economic weakness: The latest crude oil stockpile data from the U.S. Energy Information Administration this week showed stockpiles at five-week highs. It was this data on Wednesday that pushed oil prices into bear market territory.
Until the economic data improves or trade tensions quiet down, it’s hard to see oil prices coming too much off the canvas. Even still, some Wall Street firms are combing the oil patch for buying opportunities on the cheap.
Oil strategists at Morgan Stanley (NYSE:MS) continue to expect “geopolitical tailwinds” to support prices into the third quarter. The strategists remain bullish on the energy and exploration sector due to “attractive valuations.”
The United States Oil Fund (NYSE:USO) LP (USO) . Year-to-date, USO has declined -7.91%, versus a 7.15% rise in the benchmark S&P 500 index during the same period.
USO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 109 ETFs in the Commodity ETFs category.