The Worst Is Still To Come For Oil Markets

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are in a position to finish the week sharply lower despite stimulus efforts by policymakers around the world against demand destruction caused by the consequences from the rapid spread of the coronavirus. Both markets are down nearly two-thirds this year and sinking economic activity and fuel demand are expected to worsen as oil companies curtail investments in future activity.

Bearish news continued to dominate the trade this week although some investors saw potential benefits from a pledge by leaders of the Group of 20 major economies to inject over $5 trillion into the global economy to limit job and income losses from the coronavirus and “do whatever it takes to overcome the pandemic.”

The G20 pledge comes on top of a U.S. $2 trillion economic stimulus bill aimed at mitigating the economic damage from the coronavirus outbreak, however, both moves may not be enough to drive up demand for crude oil based on Friday’s price action. Furthermore, a massive surge in unemployment claims indicates fewer employees will be driving to work, which could be a further drag on gasoline demand. On Thursday, the U.S. Labor Department reported that jobless benefit claims had soared to 3.28 million the week-ending March 20, easily eclipsing the previous record of 695,000.

IEA Chief Warns Oil Demand Could Sink 20 Percent

Global demand for oil could fall by 20 percent as 3 billion people around the world live in lockdown. Head of the International Energy Agency Fatih Birol, who made this prediction, also called on Saudi Arabia to rectify the situation.

“Being the president of the G20 this year, one would expect that Saudi Arabia will provide a constructive support to the stabilization of the global oil markets based on their past record,” Birol said.

US Rescinds Offer to Buy 30 Million Crude Oil Barrels

The U.S. Department of Energy is suspending its plans to buy crude for the nation’s Strategic Petroleum Reserve after the requested $3 billion in funding for the project was left out of the $2 trillion stimulus package.

“Given the current uncertainty related to adequate Congressional Appropriations for crude oil purchases associated with the March 19, 2020 solicitation, the Department is withdrawing the solicitation,” and amendment filed Wednesday said. “Should funding become secure for the planned purchases, the Department will reissue the solicitation,” it added.

The original request for proposal, filed on March 19, outlined plans to purchase the first 30 million barrels of American-made crude oil for the SPR out of a total of 77 million barrels.

But funding to execute the plan was left out of the $2 trillion stimulus package which the White House and Senate agreed to Wednesday night, and which the House is expected to vote on on Friday. Initially, $3 billion had been requested for the project.

Following the bill’s passage in the Senate, Senate Minority Leader Chuck Schumer said in an email to senators that the revised version of the bill “eliminated [a] billion bailout for big oil.”

Technical Analysis

Weekly May WTI Crude Oil Technical Analysis

The main trend is down according to the daily swing chart. A trade through $20.52 will signal a resumption of the downtrend. This could lead to a quick test of the November 2001 main bottom at $19.44. This is a potential trigger point for an acceleration to the downside with the next target psychological support at $15.00.

The main trend will change to up on a move through $54.82. This is highly unlikely, but due to the prolonged move down in terms of price and time, all counter-trend traders can hope for is a closing price reversal bottom.

The short-term range is $54.82 to $20.52. Its 50% to 61.8% retracement zone at $37.67 to $41.72 is one potential upside target. The other is the price gap at $36.70 to $41.29.

Combining the two areas creates a major resistance cluster at $41.29 to $41.72.

Traders will also be monitoring the market’s reaction to a steep downtrending Gann angle at $16.39 during the week-ending April 3. Crossing to the weak side of this angle will put the market in an extremely bearish position.

If there is a rally, then the first upside target will be another downtrending Gann angle at $34.82, followed by $37.67 to $41.72.

Weekly Forecast

There isn’t any incentive to buy crude oil as forecasts continue to point toward $15 to $10 crude oil. The White House is urging Saudi Arabia to dial back its plan to flood the crude market. Still, any agreement to curtail supply among producers will be too little and too late in the face of an unprecedented shock for the world’s oil refining system, Goldman said.

Unless the Saudi’s rescind their threat to flood the market with crude oil, prices are doomed to drop another $5 to $10 per barrel. If they withdraw their threat then prices will surge similar amounts, but gains will be limited by extremely low demand.

The market could grind toward $16.39 last week then start to break sharply if this price fails to attract buyers.

Continuing to hold above the recent bottom at $20.52 could be an early sign that something is in the works with Saudi Arabia. If they renege on their pledge to dump oil on the market then prices could spike to $34.82 rather quickly and possibly to $37.67 to $41.72.

Those prices are best-case scenarios and based on the easing of supply concerns. However, there will still be demand concerns so it’s possible we may never see a test of those prices. Essentially, look for a massive short-covering rally if the Saudi’s back away from their threat.