Can Oil Prices Recover?

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher on Friday. The move is being fueled by stronger demand for risky assets after U.S. equity markets soared on the opening. There is also a little growing optimism that demand in Asia, especially from China, may start to pick up over the near-term as the number of new coronavirus cases in the country starts to decline.

Despite the strength at the end of the week, the markets are expected to finish the week with their worst performance since the 2008 financial crisis. Concerns continue to be driven by global demand worries and production increases from several OPEC members.

The markets gapped lower on Monday, pressured by the threat of a flood of cheap oil after Saudi Arabia announced that it would increase production on April 1 and lower export prices substantially. The moves are in retaliation to Russia’s balking at a deal with OPEC+ to reduce output.

Prices were also pressured after U.S. President Donald Trump said the United States will suspend all travel from Europe as he unveiled measures to contain the coronavirus epidemic. The travel ban, which excludes Britain, will hit U.S. airlines “extremely hard”, their industry association said. The surprise move is likely to mean a further drop in demand for jet and other fuels in an already battered oil market, although just how much is hard to quantify.

US EIA Cuts 2020 Oil Demand Growth Outlook to 370,000 b/d on Coronavirus

The EIA slashed another 660,000 b/d off its outlook for 2020 global oil demand growth, now predicting growth of 370,000 b/d from 2019.

Most of the reduction was in Chinese demand, where EIA cut expected growth for 2020 to 100,000 b/d, down from 500,000 b/d in January.

The International Energy Agency said Monday it expects 2020 demand to shrink by 90,000 b/d from 2019.

OPEC said earlier Monday that it expects 2020 oil demand to grow by just 60,000 b/d.

United Arab Emirates Plans to Boost Oil Output

UAE’s national oil company, ADNOC, followed Saudi Arabia in announcing plans to raise crude sales to more than 4 million barrels per day (bpd) and accelerates a push to boost capacity by a quarter to 5 million bpd.

U.S. Energy Information Administration Weekly Inventories Report

U.S. crude oil stockpiles rose more than expected last week, but gasoline and distillate inventories fell sharply amid low refinery rates, the EIA said on Wednesday.

Crude inventories rose 7.7 million barrels in the week to March 6, compared with analysts’ expectations in a Reuters poll for an increase of 2.3 million barrels.

Gasoline stocks fell 5 million barrels, double analysts’ forecasts. Distillate stockpiles, which include diesel and heating oil, dropped 6.4 million barrels, versus expectations for a 1.9 million-barrel drop, the EIA data showed.

Analysts said the divergent path of crude and product inventories was due to relatively low refining utilization rates, currently at 86.4% of total nationwide capacity and about on par with the last two years.

Fundamental Outlook

The fundamentals are bearish so we expect further downside pressure. At this point, it’s going to take a surprise agreement between the Saudi’s and Russia to turn this market around.

No one is expecting Russia and Saudi Arabia to end their price war soon so the markets are likely to trade sideways to lower over the near-term. Some traders expect WTI to straddle $30 a barrel until coronavirus demand concerns work their way through the markets.

Traders also expect U.S. Energy companies to cut investment and drilling plans because of plunging prices. These moves will eventually be supportive as global supply drops.

Additionally, bearish supply and demand outlooks at this time make it hard to see anything except lower prices.

Technical Analysis

Weekly May West Texas Intermediate Crude Oil Technical Analysis

Weekly Swing Chart Technical Analysis

The main trend is down according to the weekly swing chart. The downtrend was reaffirmed last Monday when sellers took out $41.29 with a gap-lower opening. A trade through $27.83 will signal a resumption of the downtrend. The main trend will change to up on a move through $54.82.

The market took out the 2016 bottom at $29.85, but quickly recaptured it after hitting a low at $27.83. The price action suggests that sell-stops were responsible for the selling pressure under $29.85.

The minor range is last week’s range at $27.83 to $36.70. Its 50% level or pivot at $32.27 appears to be controlling the short-term direction of the market.

The short-term range is $54.82 to $27.83. Its retracement zone at $41.32 to $44.51 is the short-term upside target. Since the main trend is down, sellers are likely to come in on a test of this zone.

Weekly Swing Chart Technical Forecast

Based on this week’s price action, the direction of the May West Texas Intermediate crude oil market the week-ending March 20 is likely to be determined by trader reaction to the pivot at $32.27.

Bullish Scenario

A sustained move over $32.27 will indicate the presence of aggressive counter-trend buyers. They are going to try to generate enough upside momentum to fill the price gap at $36.70 to $41.29.

If successful at filling the gap, the next objective will be the retracement zone at $41.32 to $44.51.

Combining the top of the gap and the 50% level creates a strong resistance cluster at $41.29 to $41.32. Since the main trend is down, look for sellers on a test of this area.

Bearish Scenario

A sustained move under $32.27 will signal the presence of sellers. If this creates enough downside momentum then look for the selling to possibly extend into the low at $27.83. This is a potential trigger point for an acceleration into the 2000 bottom at $21.37.