Oil Markets Are In For A Second Round Of Trouble

WTI prices are drifting lower on Friday after posting a volatile trade all week. Reports from the IMF, IEA and OPEC all centered on the same theme. The proper steps were made by the experts at the start of the pandemic to stabilize prices, but more is going to have to be done to take the global economy to the next level. Furthermore, governments are going to have to control the pandemic or the energy sector could face further destruction.

The experts all seem to agree that the fiscal and monetary stimulus thrown at the global economy in April, gave false hope of a quick recovery. It now looks like the world is going to need further stimulus or the global economy may take two steps backward, putting further pressure on prices.

Expectations of Further Demand Destruction

European nations are reviving curfews and lockdowns amid the growth in new coronavirus cases, leading to predictions of more demand destruction in the energy markets. India, which is on track to overtake the U.S. with the world’s most COVID-19 infections, is bracing for a surge of cases in coming weeks as it heads into its main holiday season. The country is the world’s third-biggest oil user, according to Reuters.

American Petroleum Institute Weekly Inventories Report

The American Petroleum Institute (API) reported on Wednesday a major draw in crude oil inventories of 5.421 million barrels for the week-ending October 9. Analysts had predicted a build of 400,000 barrels.

Oil production in the United States rebounded last week, but was still down from a high of 13.1 million bpd on March 13 U.S. oil production currently sits at 11.0 million bpd, according to the Energy Information Administration – 2.1 million bpd under those March highs.

The API also reported a draw in gasoline inventories of 1.513-million barrels of gasoline for the week-ending October 9 – compared to the previous week’s 867,000-barrel draw. Analysts had expected a 1.607-million-barrel draw for the week.

Distillate inventories were down by 3.930 million barrels for the week, compared to last week’s 1.033-million-barrel draw, while Cushing inventories rose by 2.199-million barrels.

IEA and OPEC Suggest Oil Demand Growth Could Be Weaker than Anticipated

Global oil stocks which rose during the height of the pandemic are being steadily reduced, the International Energy Agency (IEA) said on Wednesday, but a second wave is slowing demand and will complicate efforts by producers to balance the market.

“There is only limited headroom for the market to absorb extra supply in the next few months,” the IEA said in its monthly report. “Those wishing to bring about a tighter oil market are looking at a moving target.”

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart, however, momentum is trending lower. A trade through $44.33 will signal a resumption of the uptrend. A move through $25.31 will change the main trend to down.

The minor trend is down. This is controlling the momentum. The minor top is $42.02. Taking out this level will change the minor trend to up and shift momentum to the upside.

The main range is $59.51 to $25.31. Its 50% to 61.80% retracement zone at $42.41 to $46.45 is the major resistance.

The short-term range is $25.31 to $44.33. Its retracement zone at $34.82 to $32.58 is a potential support zone. Since the main trend is up, buyers are likely to come in on the first test of this area.

Weekly Technical Forecast

Based on the price action the past two weeks, the direction of the December WTI crude oil market next week is likely to be determined by trader reaction to the minor pivot at $40.63.

Bullish Scenario

A sustained move over $40.63 will indicate the presence of buyers. A move through $42.02 will change the minor trend to up and shift momentum to the upside. This is likely to trigger a surge into the main 50% level at $42.41. Overtaking this level will indicate the buying is getting stronger. This could create the upside momentum needed to challenge the main top at $44.33.

A trade through $44.33 will signal a resumption of the main trend after six weeks of sideways-to-lower price action. This could lead to a test of the main Fibonacci level at $46.45.

Bearish Scenario

A sustained move under $40.63 will signal the presence of sellers. This will indicate that sellers are defending the retracement zone at $42.41 to $46.45 and the main top at $44.33.

The first downside target is a minor pivot at $39.48. If this price fails as support then look for the selling to possibly extend into the minor bottom at $36.93.

If $36.93 fails as support then look for a break into the short-term retracement zone at $34.82 to $32.58.

Short-Term Outlook

Hovering around the mid-point of its six-month trading range suggests the market is balanced. The news seems to be balanced also with reports of possible lower demand being offset somewhat by the OPEC+ production cuts.

The news also seems to be centered on the same theme:  The right moves were made early to prevent a disaster in the global economy, but if governments can’t gain control of the pandemic, we’re all in for a second round of trouble.

We could be looking at a sideways range over the near-term as traders continue to weigh the impact of lower demand against the production cuts. But eventually, something will have to give. Either we gain control of the virus and thus demand, or inventory issues will put pressure on prices.