Executive Edge

Crude bear market: History says oil prices can fall another 10%

Key Points
  • When crude oil falls below $50, it tends to stay down, and a negative trend in the S&P 500 follows.
  • WTI crude has declined 20% in the past month, and it could shed another 10%, based on history.
The bearish trend for oil will most likely continue

WTI crude dipped below $50 per barrel on Monday, the first time oil dipped below that level in more than a year. Oil prices are now in bear market territory compared to their previous 52-week highs, and WTI crude has dropped 20% over the past month. Even with an early bump in oil on Tuesday crude settled lower for the day, and don't expect the bearish trend in the commodity to reverse itself soon, according to trading history over the past decade.

According to hedge fund analytics tool Kensho, a month after similar drops, WTI crude tends to shed another 10%. It trades negatively 60% of the time during these periods — across five instances in the past decade — which also have been hard on equities. The S&P 500 has averaged a decline of 1.6% during these one-month trading windows and posts a negative trade 60% of the time.

The trading action in WTI crude and Brent crude through Monday has been rough, as fears of the coronavirus ripple through the global economy, and China, which now represents near-20% of the world's economy, is at risk of seeing slower growth.

WTI hit its lowest settle price since January 2019 and has been negative in nine of the past 10 sessions, settling below its 50-day moving average for the 15th consecutive day. WTI is currently in bear market territory, according to CNBC data, 24.76% off its most recent 52-week high of $66.60, hit in April 2019.

Brent had its lowest settle price since December 2018 on Monday and is in bear market territory, 27.98% off its most recent 52-week high, from April 2019. It has been below its 50-day moving average for 10 days in a row.

OPEC and Russia are considering an emergency production cut, but oil is still tanking, and the outlook for prices is getting dimmer.

An oil well owned and operated by Apache Corp. in the Permian Basin of Garden City, Texas.
Spencer Platt | Getty Images

Citigroup energy analysts cut their price expectations for crude from the high $60s for Brent this year to the $50s, including an average of $54 for the first quarter and $50 for the second quarter. They said Brent could touch as low as $47. "The depth of the impact on oil looks much deeper than we initially thought, even with a deeper OPEC+ cut, with Chinese government measures amounting to a major shutdown of the economy," the analysts wrote.

"We're certainly going to take a trip down in the upper $40s for a time here, potentially the low $40s, but that's as far as I'll go. We just don't know enough," John Kilduff, partner with Again Capital, told CNBC on Monday.

Oil prices were trading in positive territory on Tuesday after the two-week slide.

BP's CFO Brian Gilvary told Reuters on Monday that the economic slowdown brought on by the virus will reduce oil consumption for the whole year by 300,000 to 500,000 barrels per day (bpd), roughly 0.5% of global demand. He said OPEC cuts through year-end should rebalance the market.

OPEC may face an uphill battle on cuts amid uncertainty over the coronavirus impact.

"Any changes in supply policy ... will be decided on the basis of their assessment of the duration of the impact of the coronavirus," BNP Paribas global head of commodity strategy Harry Tchilinguirian told the Reuters Global Oil Forum, adding, "If the producer group believes the outbreak to be contained with effects tapering out after a short period, like SARS, they have the option to stand pat and weather the lower-price environment until demand returns."