Coronavirus: Is The Worst Still To Come For Oil?

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Friday, however, momentum is clearly to the downside as traders continue to worry about the coronavirus’ impact on global demand. Both futures contracts are in a position to post their fourth consecutive weekly loss.

Early in the session, the markets were boosted by comments from the World Health Organization (WHO) that seemed to calm tensions. On Thursday, the WHO declared the coronavirus a global emergency, but calmed the markets by opposing travel restrictions. It also said Chinese actions so far will “reverse the tide” of the spread and that it declared the emergency to help those countries with weak health systems.

Coronavirus Update

On Thursday, the WHO director-general said the greatest concern was the virus’ potential spread to countries with weaker healthcare systems, compounded by cases of person-to-person transfer of the virus outside China.

Meanwhile, economists have signaled the impact of the new virus could be worse than that of the Severe Respiratory Syndrome (SARS) epidemic in 2002-2003, which took 800 lives and cost the global economy and estimated $33 billion.

The death toll from the virus crossed the 200-mark in China with confirmed cases of infection reported in at least 22 other countries and regions.

Major airlines across the globe are suspending direct flights to and from mainland China causing jet fuel demand to plunge. This is also hurting refiners’ profit margins.

OPEC+ Wants to Extend Oil Production Cuts

According to sources, OPEC and its allies including Russia want to extend oil production cuts until at least June from March, and may deepen the reductions, should demand for oil in China be significantly reduced by the spread of the virus. This story underpinned crude oil prices briefly early Friday.

It’s a story that should be watched over the near-term, but the move may not be enough to stabilize prices for a long-period of time. However, the announcement could trigger a short-covering rally.

China Manufacturing Activity in Line with Expectations but Likely to Worsen

Growth in China’s factory activity faltered in January, an official survey showed, as export orders fell and an outbreak of a new virus added to risks facing the world’s second-largest economy, Reuters reported.

While the PMI showed activity in some parts of the sector holding up, economists are doubtful the survey provides a meaningful read on the economy given recent developments with the coronavirus and distortions from the Lunar New Year break.

The numbers do not reflect the interruption due to the outbreak. This is another bearish development weighing on future demand for crude oil

U.S. Energy Information Administration Weekly Inventories Report

On Wednesday, the EIA said crude stocks rose by more than seven times market expectations, gaining 3.5 million barrels in the week to January 24. Gasoline stocks rose to a record high, increasing for a 12^th consecutive week to 261.1 million barrels, the EIA said.

Libya Supply Woes Offer Some Relief

Although the focus is primarily on demand, traders are reminded that outages in Libya should be watched.

“While demand is a real concern, it’s important not to forget about the supply disruptions from Libya – if these losses persist, it would be enough to swing the market into deficit this quarter,” ING said in a note.

Technical Analysis

Weekly March West Texas Intermediate Crude Oil Technical Analysis

Weekly Trend indicator

The main trend is up according to the weekly swing chart, but momentum has been trending lower since the formation of the closing price reversal top at $65.40 the week-ending January 10.

The main trend will change to down on a trade through the nearest main bottom at $50.18. Taking out the next main bottom at $50.08 could trigger an acceleration to the downside. The next target after that is the $45.76 main bottom from the week-ending December 28, 2018.

The main range is $71.83 to $45.76. Its 50% to 61.8% retracement zone at $58.80 to $61.87 is major resistance.

The short-term range is $45.76 to $65.40. Its retracement zone at $53.26 to $55.58 is new resistance. Trading below this area is also helping to generate the downside bias.

Weekly Trend Indicator Forecast

Based on this week’s price action and the current price at $51.66, the direction of the March WTI crude oil market during the week-ending February 7 is likely to be determined by trader reaction to the short-term Fibonacci level at $53.26.

Bearish Scenario

A sustained move under $53.26 will indicate the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend into the pair of main bottoms at $50.18 to $50.08.

Taking out the bottoms will change the main trend to down on the weekly chart. This could trigger an acceleration to the downside with the next major target $45.76.

Bullish Scenario

Overcoming and sustaining a rally over $53.26 will signal the return of buyers. This could trigger a surge into $55.58. Taking out this level could trigger an acceleration to the upside.

Conclusion

Given the fear of the unknown, it’s hard to find a reason to go long or cover short positions ahead of the weekend.