As fears about the spread of the Wuhan coronavirus prompted selling in markets around the world last week, oil was one of the hardest hit. Earlier this week, however, when rumors were circulating about possible OPEC action to offset the fall, futures bounced. The question is, is it reasonable to expect action from the cartel and, perhaps more significantly, is that action needed?
If you stop and think about it logically, further production cuts based on the coronavirus outbreak would be absurd. This is a headline event that has caused a lot of completely unwarranted panic, and we have seen it all before. Whether it was SARS, MERS or Ebola, these outbreaks of scary diseases have become increasingly common of late. That in itself is cause for concern, but, like the others, this specific one will be history very soon.
It could be that over decades, the cumulative effect of these diseases will be to marginally depress global demand for oil, but that would simply mean very slightly slower growth than there would otherwise have been. That hardly justifies the kind of panic selling we have seen over the last week or two.
In context, however, it makes perfect sense.
Oil has been falling dramatically for a month now and in that environment, the impact of any bad news gets magnified. Even the risk of a big but temporary negative impact on demand becomes a major worry and prompts heavy selling. When you look at the chart though, it looks as though that selloff was…
As fears about the spread of the Wuhan coronavirus prompted selling in markets around the world last week, oil was one of the hardest hit. Earlier this week, however, when rumors were circulating about possible OPEC action to offset the fall, futures bounced. The question is, is it reasonable to expect action from the cartel and, perhaps more significantly, is that action needed?
If you stop and think about it logically, further production cuts based on the coronavirus outbreak would be absurd. This is a headline event that has caused a lot of completely unwarranted panic, and we have seen it all before. Whether it was SARS, MERS or Ebola, these outbreaks of scary diseases have become increasingly common of late. That in itself is cause for concern, but, like the others, this specific one will be history very soon.
It could be that over decades, the cumulative effect of these diseases will be to marginally depress global demand for oil, but that would simply mean very slightly slower growth than there would otherwise have been. That hardly justifies the kind of panic selling we have seen over the last week or two.
In context, however, it makes perfect sense.
Oil has been falling dramatically for a month now and in that environment, the impact of any bad news gets magnified. Even the risk of a big but temporary negative impact on demand becomes a major worry and prompts heavy selling. When you look at the chart though, it looks as though that selloff was coming anyway, and coronavirus is just an excuse…
The light blue trend lines on the chart indicate a classic Elliott Wave pattern, with the coronavirus-linked selling being wave 5. True devotees of Elliott theory will tell you that the minute the wave 4 retracement began to reverse, that was inevitable, virus or no virus.
Coronavirus may also be little more than an excuse when it comes to OPEC's discussion of further cuts too.
The problem for OPEC+ does not come from the relatively small fifth wave, it comes from the previous four. They show that the group's efforts to prop up the price are failing and were doing so when most people probably thought coronavirus was just a bad hangover from drinking too much Mexican beer.
If they were to increase the cuts to offset that, it would be an admission that their actions to that point had been ineffective. That, in turn, would make it highly unlikely that any further cuts would have a lasting impact. The coronavirus outbreak gave them a way out. They can now talk about another round of cuts as a response to a specific event rather than as the result of them having had no impact up until now.
In fact, they may not even have to make any cuts; talking about them may be enough. That was what seemed to happen on Wednesday when oil jumped, although the last two days show that the OPEC+ bounce is not what it once was and that is not good news for oil prices in the near future.
Overall, it looks as if OPEC's deliberations are something that would have been unthinkable in the past…irrelevant. The direction of oil from here will be far more dependent on technical factors such as whether the low just below $50 holds again, and the fundamental influences are far more about U.S. supply and global growth expectations than about anything OPEC does. Those things, not news from OPEC, are what energy investors should be watching.
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