How China Could Ignite An Oil Price Rebound

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures hit multi-year lows on Friday and were set for their steepest weekly decline in more than four years as the spread of the coronavirus raised fears of a global recession and consequently lower demand for crude oil and other refined fuels.

Benchmark Brent crude, which fell yet another 4% on Friday, has lost over 12% this week, putting it on track for its steepest decline since January 2016.

Coronavirus Continues to Cause Demand Worries

Oil prices are down for a sixth consecutive day on Friday as a growing number of new coronavirus cases outside of China fueled fears of a pandemic which could slow the global economy and lower crude demand.

On Wednesday, for the first time ever, the number of new coronavirus infections outside China, the source of the outbreak, exceeded the number of new Chinese cases.

Late Wednesday, President Trump tried to calm investor nerves by telling Americans that the risk from coronavirus remained “very low,” and placed Vice President Mike Pence in charge of the U.S. response to the looming global health crisis.

He also said the spread of the virus in the United States was not “inevitable” and then went on to say: “It probably will, it possibly will. It could be at a very small level, or it could be at a larger level. Whatever happens, we’re totally prepared.”

Global Fuel Demand Limited

The coronavirus’ spread to large international economies including South Korea, Japan, and Italy has caused concerns that fuel demand growth will be limited. On Wednesday, consultants Facts Global Energy forecast oil demand growth will only be 60,000 barrels per day in 2020, or practically “zero”, because of the widening outbreak.

Coronavirus Spread in US Fuels Fresh Round of Selling

Speculators bet heavily this week that coronavirus may spread in the United States. If the outbreak continues to worsen in the U.S. then look for energy prices to continue to fall with the move led by gasoline. The United States is the world’s largest oil producer and consumer.

Gasoline stockpiles dropped by 2.7 million barrels in the week to February 21 to 256.4 million, the U.S. Energy Information Administration (EIA) said on Wednesday, amid a decline in refinery throughput. Distillate inventories fell by 2.1 million barrels to 138.5 million.

U.S. crude oil stockpiles increased by 452,000 barrels to 443.3 million barrels, the EIA report showed. This was less than the 2-million barrel rise analysts had expected.

Still Hope of Rebound in Demand

Some market participants are expecting the recent sell-offs to be reined in as soon as the demand fears wane. Furthermore, with coronavirus cases in China beginning to slow, the country may soon return to full production, while the spread of the virus runs its course throughout the rest of the world.

Crude oil prices are at bargain-basement levels, but the downside momentum is keeping buyers on the sidelines. However, positive news next week could send prices sharply higher. One positive will be the belief that the COVID-19 virus is being contained.

The markets are getting pretty close to levels that will become attractive to speculators, but there has to be a catalyst to get the markets moving higher. China’s PMI data over the weekend are expected to come in weak, but that news may already be priced into the market. We may even see better-than-expected data, could encourage some of the weak short-sellers to cover their positions.

News from China started the selling, and news from China is likely to ignite the rally. If you believe the data, the virus may be subsiding in China and the country may start to go back to work. Once investors know the duration of the virus then they’ll be better able to figure out when the outbreak is likely to end in the rest of the world. This will then encourage more buying in crude oil along with extremely cheap prices.

Weekly Technical Analysis

With this type of price action and chart pattern, you can throw out most technical oscillators and indicators because right now it’s all about price. Every technical indicator is showing oversold, but that doesn’t mean it’s a buy.

The market has to stop going down. Then settle. Buying because it’s relatively cheap without knowing where your exit is, can get you in trouble. I liken it to trying to kick a soccer ball while it’s still rolling. You never know which direction it will go.

Oscillators and indicators are coincidental. When a market hits an extreme level, they all turn higher and traders see that it was oversold after the fact.

Watching the price action means, looking for the bottoming process to develop. The most aggressive speculative buy signal will be the lower-low, higher-close, more commonly known as the closing price reversal bottom. A second bottoming signal is the building of a support base. With bottoms, the formation commonly takes the form of the letter “W”.

WTI Has Reached a Value Zone      

We have identified the price zone for value. It’s $45.92 to $43.55. Both are tied to news also. The first bottom at $45.92 is from December 24, 2018, shortly before OPEC and its allies began their second wave of production cuts.

The second bottom at $43.55 from January 20, 2016, began when OPEC+ originally implemented its plan to trim production.

Since both bottoms have OPEC+ as their nexus, perhaps this bottom will also be triggered by news from OPEC+. Russia recently said that it cannot make a decision about whether to cut production because it doesn’t have enough data on the impact of the coronavirus on demand, especially from China.

If the impact of the virus starts to subside in China then perhaps Russia will go into the OPEC meeting on March 6 to 7 with enough evidence to make a decision. If they do go along with the suggested cuts in output then this may be the spark the market needs to fuel a strong short-covering rally.