Increasing Uncertainty Caps Oil Price Gains

U.S. West Texas Intermediate crude oil futures are trading lower on Friday, pressured by the steady rise in coronavirus infections and as the outcome of the U.S. presidential election remains unsettled. Nonetheless, the market is expected to finish the week higher after reversing weakness. 

Near-term losses could be limited by expectations for a weaker U.S. Dollar and the possibility that OPEC and its allies could take action to stabilize or increase their current production cuts.

Heightened Demand Worries in Europe

Helping to drive the market lower are worries about demand destruction due to the rapidly rising number of COVID-19 cases around the world. On Thursday, the European Union’s executive commission lowered its economic forecast, adding that the economy would not rebound to pre-virus levels until 2023.

Additionally, European Central Bank (ECB) Vice-President Luis de Guindos said on Friday that Euro Zone growth will likely be negative in the fourth quarter, as countries have imposed new restrictions to the economic activity over the past weeks in a bid to slow the coronavirus contagion.

The European Commission downgraded its GDP forecast expectations for 2020 and 2021 because of the second wave of infections.

Meanwhile, Italy recorded its highest daily number of infections on Thursday and cases surged by at least 120, 276 in the United States, the second consecutive daily record as the outbreak spreads across the country.

Divided Congress to Weigh on Stimulus

Investors are betting that Democrat Joe Biden will become the next president but Republicans will retain control of the Senate, which will make it difficult for the Democrats to pass the larger fiscal spending they have been pushing.

Current vote counting and trends suggest the Republicans are poised to retain control of the U.S. Senate, while the Democrats will hold a slimmer majority in the House of Representatives.

This concern is weighing on demand for U.S. gasoline and distillates.

US Crude Oil Stockpiles Fell Sharply

U.S. crude oil stockpiles fell sharply last week, as a storm cut production in the U.S. Gulf of Mexico, while gasoline stocks increased and distillate inventories fell, the Energy Information Administration said on Wednesday.

Crude inventories fell by 8 million barrels in the week to October 30, compared with analysts’ expectations for an increase of 890,000 barrels. Gasoline stocks rose by 1.5 million barrels, compared with analysts’ expectations in a Reuters poll for an 871,000-barrel drop. Distillate stockpiles, which include diesel and heating oil, fell by 1.6 million barrels, versus expectations for a 2.0 million-barrel draw, the EIA data showed.

Crude production fell 600,000 barrels per day to 10.5 million bpd last week, the EIA said. Stocks at the Cushing, Oklahoma delivery hub for U.S. crude futures rose by 936,000 barrels, the EIA said. Refinery crude runs rose by 164,000 bpd and refinery utilization rates rose by 0.7 percentage points, EIA data showed.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis

The main trend is down according to the weekly swing chart. A trade through $41.90 will change the main trend to up, while a move through $33.64 will signal a resumption of the downtrend.

The main range is $59.51 to $25.31. Its retracement zone at $42.41 to $46.45 proved to be solid resistance, stopping the rally at $44.33 the week-ending August 28.

The short-term range is $25.31 to $44.33. Its retracement zone at $34.82 to $32.58 is the primary downside target. This zone stopped the selling at $33.64 this week. It remains a major support area.

The new minor range is $41.90 to $33.64. Its 50% level or pivot is $37.32.

Weekly Technical Forecast

Based on this week’s price action, the direction of the December WTI crude oil market the week-ending November 13 should be determined by trader reaction to the minor 50% level at $37.32.

Bullish Scenario

A sustained move over $37.32 will indicate the presence of buyers. If this move creates enough upside momentum then look for the counter-trend rally to possibly extend into the resistance cluster at $41.90 - $42.02, followed by the main 50% level at $42.41.

Bearish Scenario

A sustained move under $37.32 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend the major support zone at $34.82 - $32.58. The latter is also a potential trigger point for an acceleration to the downside.

Short-Term Outlook

Although the election results are important to the long-term direction of oil prices, we feel the most important factors driving the price action at this time are COVID-related restrictions and growing expectations that OPEC and its allies would postpone bringing back 2 million bpd of supply in January given demand has been sapped by new COVID-19 lockdowns.

The charts indicate the downside could be limited because of a major support zone and the upside could be limited because any bullish moves by OPEC+ will likely be offset by a COVID-related issue. This could lead to a rangebound trade over the near-term.