2020-02-06 • Updated
The beginning of the year was promising for the oil market. US-Iran tensions boosted both major crude benchmarks. Brent touched the highs of September 2019, WTI was at the levels of May 2019. However, the coronavirus caused a plunge of the recently recovered oil. We will consider the reasons behind that and make forecasts for the upcoming moves.
The spread of the coronavirus with an increased number of infected people and confirmed deaths caused risks of the slowdown in the Chinese economy. Two-thirds of China’s workforce can’t go to work. Huge factories, stores, and restaurants such as Apple and Starbucks are closed.
China is the world’s largest oil importer. That’s why the oil market is under pressure. Moreover, traditionally, the Lunar New Year holiday is the time of increased jet-fuel demand as Chinese citizens travel and go back home. This time, millions of people were locked and flights were canceled. The decline in the industrial activity led to an additional slide in oil consumption.
According to Bloomberg, coronavirus caused a decline of about 20% of total consumption.
Since last week, China stopped purchasing Latin American oil cargoes, while import of West African crude is lower than usual. The nation’s biggest refiners have been shortening runs at their plants.
Analysts call this dramatic fall the most sudden since the attacks of 2011 and the most shocking since the global financial crisis of 2008 to 2009. Currently, only cut of the oil production can save the situation.
China is one of the largest importers of OPEC oil. It purchases more than 70% of its crude from OPEC and its Russian-led allies. It makes the situation with the coronavirus critical for OPEC+.
The most important problem that may arise for the OPEC allies is the unwillingness to cut oil production more. We all remember that the organization together with Russia agreed to cut the production significantly to boost oil prices. It means there is a small room to cut more. Moreover, countries need money to support the domestic economy.
Parties discuss the possible shortage of the production. However, until now, allies couldn’t come to any decision. Previously, Saudi Arabia offered a short-term oil production cut of 500,000 barrels per day. Another option is a temporary cut of one million barrels a day.
Nevertheless, Russia disagrees with the deeper cut and supports an extension of the output cuts until the end of March 2020 (this was agreed in December 2019).
There are odds of the soon OPEC meeting that can be moved from March 5-6.
Any positive news on the deeper cuts will boost the price of the oil benchmarks especially Brent. Until then, prices may fall further down.
Let’s have a look at the technical setup.
On the daily chart of Brent, the downtrend took place on January 8 after the US-Iran tensions calmed down. Currently, the price is at the lows of December 2018. Wednesday’s pullback was caused by the positive news declaring scientists developed an effective drug against the coronavirus. However, rumors were not confirmed by the World Health Organization.
If OPEC allies agree on the extension of the output cuts, Brent will get a chance to rise. Resistances are at 57.40, 60.60, 63.20. Negative comments on the coronavirus may pull the benchmark down. Supports are located at 53.75, 50.30, 45.70.
As for WTI. The picture is similar. Besides positive comments on the effective drug against the coronavirus, a sharp decline in the US Crude Oil Inventories was a driver of the market. WTI will be boosted in the case of the additional output cut or positive comments on the virus. Resistance levels are placed at 56.75-58.60, 63.20-65.00. In the case of the prolonged decline, supports are at 49.40, 45.00, 42.30.
To conclude, the dramatic fall of the oil market was caused by the spread of the coronavirus. An extension of the virus will increase the risks of the prolonged plunge. If OPEC allies can’t agree on the additional production cuts, the oil will suffer for a long time.
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