Oil Fundamentals Need to Improve Or Bounces Will Attract Attention

  • Coronavirus is hurting demand for oil and action is needed by OPEC+ to support prices.

Oil Hit From Both the Demand and Supply Sides

Oil fell heavily on Monday following concerns about the spread of the coronavirus outside of China, with cases growing in South Korea and Italy. Moreover, the virus has exacerbated an already poor economy where China is concerned. These have increased fears of declining demand for oil, which has seen the price of crude drop.

This situation has been aggravated when OPEC+ decided not to move its March meeting (taking place on the 5th and 6th) forward to February to counter the fall in demand. Moreover, Russia has not confirmed on whether it intends to cut production further or not, maintaining that “[they] will monitor how the situation evolves,” and referring to the 10% increase in price from recent lows. It is also worth noting that the current cuts (1.7m bpd) are due to expire at the end of March. If these are not reinstated, it will bring even more supply back on to the market, although we don’t think that this scenario is likely i.e. these cuts will be reaffirmed at the March meeting.

Oil Bounces May Be Target By Shorts

The left chart shows the daily timeframe for UKOil. Its price is looking to drop back below its declining black 20-day SMA (blue rectangle). If it does, this will be a bearish development. The RSI has already pushed back below 50 (aqua ellipse), which is the bearish side of the oscillator. The right chart shows the hourly time frame of UKOil. On the short time frame, prices are looking oversold. However, any bounce from these levels, given the pressure on demand and supply, may be targeted by short sellers. As such, any rise may be viewed as a bear market rally and may be limited in nature.