Crude Oil Bear Market: Worst Case Scenarios for 2016

WTI (West Texas Intermediate) crude oil futures contracts for February delivery are trading close to 2009 lows. Prices are following a long-term falling trend. Oil prices rose for the first time in the last six trading sessions. The estimates of rising crude oil inventories could drag crude oil prices lower.

On the other hand, short covering and bargain buying could boost oil prices. The resistance level for oil prices is $40 per barrel. The long-term oversupply concerns and the consensus of a rising US dollar (UUP) could push crude oil prices lower. Crude oil prices could see their next support level at $34 per barrel.

Open interest in the options market suggests more pain for crude oil prices. The crude oil bear market has led to an accumulation of put options on crude oil contracts. We’ve seen crude oil put options with strike prices as low as $15 per barrel. This means that if oil prices fall to $15 per barrel, only the put options buyer will benefit. Many put options were purchased at strike prices of $30, $25, and $20 per barrel.

The highest put options for December 2016 options contracts have come in at $30 per barrel. Oil traders could also buy put options to offset the crash of individual oil stocks like Occidental Petroleum Corporation (OXY), Hess Corporation (HES), and Apache Corporation (APA). Lower oil prices also affect the performance of international oil stocks like Eni, Royal Dutch Shell (RDS.A), Total (TOT), and Petrobras (PBR).

Goldman Sachs (GS) suggests crude oil prices could test $20 per barrel in a worst case scenario in 2016. Venezuela’s government suggests oil prices could test $25 per barrel if OPEC continues to produce at record levels. The EIA (U.S. Energy Information Administration) estimates that Brent crude oil prices could average $56 per barrel and WTI crude oil prices could average $51 per barrel in 2016.

Falling oil prices also affect ETFs like the iShares US Oil & Gas Exploration & Production ETF (IEO) and the PowerShares DWA Energy Momentum Portfolio (PXI).

For an in-depth look at the oil and gas sector, visit Market Realist’s Energy and Power page.