FxWirePro: Expect Brent crude to dip below $40 per barrel

The ongoing bloodbath in oil is likely to continue in the weeks and months ahead. In late April, we forecasted that WTI would decline from the then current rate of $49.6 per barrel to $43 per barrel. This week’s big selloff has pushed the oil price close to our forecasted target. WTI declined to as low as $43.7 per barrel while the North Sea benchmark Brent declined below $50 per barrel for the first time since the OPEC deal was agreed upon on November 30th.

Thanks to the agreed deal between the OPEC members and participating 11 non-OPEC countries, supplies got reduced by almost 1.8 million barrels per day, however, the supply reduction failed to significantly reduce the high levels of global inventory. In February and in March inventories declined by a total 30 million barrels; it is minuscule compared to the 3.05 billion barrels of inventory worldwide. Earlier this year, the long positions held by speculators in oil futures contract hit a record high according to data from Commodity Futures Trading Commission (CFTC) and we warned that position covering could lead to a sharp selloff if the deal effect underwhelms.

We have now extended our forecasted target for the WTI from $43 per barrel to $38 per barrel and we expect the Brent to follow suit. According to our calculation, Brent crude, which is currently trading at $47.9 per barrel is likely to decline below $40 per barrel.