How low can Oil go and why I am buying Oil now?

Oil prices tumbled in the last few weeks fueled by the tussle between Saudi Arabia and Russia who are both mammoth oil producers. Oil is the lifeline for both these countries as their fortunes are directly linked to Oil prices. According to the International Monetary Fund( IMF), Oil accounts for 70 % of Saudi Arabi's government income. For Russia, the number is 40 % including natural gas.

The prices tumbled to 31 $ per barrel on 6 March 2020, when Putin refused to go along with Saudi Arabia's plan to cut oil production. Saudi's responded with massive production increase for April, which Russia matched. Prices tumbled.

Source: Bloomberg Markets.

After yesterday's fall, the WTI Crude now stands at 22.63 $ a barrel. Oil fall has added further to the markets crisis caused by the coronavirus pandemic. The US stands to lose massively in this Oil war between Saudi's and the Russians. US shale oil producers in Texas and New Mexico stands to lose massively as its no longer profitable for them to extract oil at these prices. Since drilling is very expensive for American producers than the Russians and Saudis, this could send the US shale oil industry to collapse if these prices continue here for long. US shale oil producers need an average $40 to $50 per barrel to breakeven. It does not help that demand has almost died due to the airlines grounding 90 per cent of their flights and the whole world put in a quarantine situation. If the Russians and Saudis don't settle this ego battle, It would affect their fortunes also in a big way. Saudi Arabia needs oil prices of more than $80 per barrel to balance its budget. Else they will be forced to use their cash reserves of $500 billion which is already down a third from what it was in 2014. Russia needs the Oil prices to be around $50 per barrel to balance its budget. Russians do have a cash reserve of $570 billion which is slightly higher than Saudi Arabia at the moment giving them a slightly stronger hand than Saudi Arabia.

Although lower prices are a boon for the customers at the moment, its indirect impact on the economy is severe as Oil makes up a significant portion of the world's financial markets. Since these prices don't make any economic sense for any of the oil producers who are already facing a severe drop of demand, it's my personal opinion that Saudis and Russians would come to their senses and drop oil production which may provide a bottom for the oil prices and could send the prices going up again when the world returns to normal post the quarantine situation. US could also add pressure since this affects them in a significant manner too since the US is also now one of the major oil producers in the world.

As far as my personal trading opinion goes, I am very comfortable buying into this bargain caused by the fall in the oil prices. We still need Oil and the world is going to dependant on Oil for at least next few decades. I am quite happy to buy Oil and wait it out to come out of this temporary crisis. The downside risk from these prices are very less since the majority of the fall has already happened. I am personally buying crude oil futures. For the rest of you who cant buy Oil futures (I recommend not to even if you have an idea on how to), I would advise on looking at some quality companies in the Oil space like the following names:

1. Occidental Petroleum - fallen by more than 80 per cent in a year.

2. Royal Dutch Shell PLC- fallen by more than 60 per cent in a year.

3. Exxon Mobil Corp- fallen by more than 57 per cent in a year.

3. British Petroleum - fallen by more than 57 per cent in a year.

The prices could fall a bit more, but I would be very comfortable adding to my positions at every fall.

Supreeth Shankarghal.