U.S. West Texas Intermediate crude oil futures plunged on Friday as the discovery of a new and possibly vaccine-resistant coronavirus variant spooked investors, raising concerns over potential demand destruction and adding to worries that a supply surplus could swell in the first quarter.
The U.S. benchmark fell along with equities and other commodities on fears the variant could dampen economic growth and fuel demand. Britain and the European states have restricted travel from southern Africa, where the variant was detected.
Earlier in the week, prices see-sawed, first pressured by worries about the release of oil from government reserves then supported as this move proved to be much smaller than anticipated. Furthermore, investors are awaiting a response from OPEC+ when it meets to discuss its production deal on December 2.
US and Allies Challenge OPEC+ with Release of Oil Reserves
The administration of U.S. President Joe Biden announced on Tuesday it will release millions of barrels of oil from strategic reserves in coordination with China, India, South Korea, Japan, and Britain, to try to cool prices after OPEC+ producers repeatedly ignored calls for more crude.
Under the plan, the United States will release 50 million barrels, the equivalent of about two and a half days of U.S. demand. India, meanwhile, said it would release 5 million barrels, while Britain said it would allow the voluntary release of 1.5 million barrels of oil from privately…
U.S. West Texas Intermediate crude oil futures plunged on Friday as the discovery of a new and possibly vaccine-resistant coronavirus variant spooked investors, raising concerns over potential demand destruction and adding to worries that a supply surplus could swell in the first quarter.
The U.S. benchmark fell along with equities and other commodities on fears the variant could dampen economic growth and fuel demand. Britain and the European states have restricted travel from southern Africa, where the variant was detected.
Earlier in the week, prices see-sawed, first pressured by worries about the release of oil from government reserves then supported as this move proved to be much smaller than anticipated. Furthermore, investors are awaiting a response from OPEC+ when it meets to discuss its production deal on December 2.
US and Allies Challenge OPEC+ with Release of Oil Reserves
The administration of U.S. President Joe Biden announced on Tuesday it will release millions of barrels of oil from strategic reserves in coordination with China, India, South Korea, Japan, and Britain, to try to cool prices after OPEC+ producers repeatedly ignored calls for more crude.
Under the plan, the United States will release 50 million barrels, the equivalent of about two and a half days of U.S. demand. India, meanwhile, said it would release 5 million barrels, while Britain said it would allow the voluntary release of 1.5 million barrels of oil from privately held reserves.
Traders Await OPEC+ Response to Coordinated Oil Release
OPEC+, which includes Saudi Arabia and other U.S. allies in the Gulf, as well as Russia, has rebuffed requests so far to pump more. It meets again on December 2 to discuss policy but has so far shown no indication it will change tack.
Suhail Al-Mazrouei, energy minister of the United Arab Emirates, one of OPEC's biggest producers, said before details of the release of U.S. reserves were announced that he saw "no logic" in lifting UAE supply for global markets.
An OPEC+ source said releasing reserves would complicate its calculations, as it monitors markets on a monthly basis. However, they and several analysts said the release was not as big as the headline figure suggested. They said Britain and India were releasing modest amounts and the United States had already announced some releases, and so the additional quantity was less than expected.
Weekly Technical Analysis
Weekly January WTI Crude Oil
Trend Indicator Analysis
The main trend is up according to the weekly swing chart. However, momentum shifted to the downside with the confirmation of the closing price reversal top from the week-ending October 29.
A trade through $83.83 will negate the closing price reversal top and signal a resumption of the downtrend. A move through $60.77 will change the main trend to down.
The minor trend is down. The minor trend changed to down this week when sellers took out the minor bottom at $77.23 the week-ending November 19. The move confirmed the shift in momentum to down.
Retracement Level Analysis
The minor range is $60.77 to $83.83. The market is currently testing its 50% level at $72.30.
The short-term range is $55.30 to $83.83. Its 50% level at $69.57, followed by another 50% level at $66.51.
The 50% level at $66.51 is not only potential support, but also the trigger point for an acceleration to the downside with the support cluster at $61.04 to $60.77 the best target and value area. New buyers could show up on a test of this area.
Weekly Technical Forecast
The direction of the January WTI crude oil market the week-ending December 3 will be determined by trader reaction to $72.30.
Bullish Scenario
A sustained move over $72.30 will indicate the presence of buyers. If this move is able to generate enough upside momentum then look for a possible retracement into $78.07. This is a potential trigger point for an acceleration to the upside.
Bearish Scenario
A sustained move under $72.30 will signal the presence of sellers. This could create the downside momentum needed to drive the market to $69.57. Watch for a technical bounce on the first test of this level. If it fails, the market could continue lower to $66.51. Once again buyers could show up.
If $66.51 fails then look out to the downside. This could trigger the start of a steep break down to the $61.04 to $60.77 range. This is a value area so look for stronger buying.
Short-Term Outlook
Friday's price action suggests the news about the new coronavirus variant will dominate the market during the upcoming week. However, we first have to find out how much of the move is real and how much is exaggerated due to thin post-holiday volume.
After the market figures out how much it wants to discount the possibility of another wave of COVID-19 destruction, the focus will shift to OPEC+'s response to the release of crude oil from the SPR.
The ball is definitely in OPEC+'s court since they have been controlling the supply for over a year. They still have the power to offset some of the releases and we know from previous comments that they have made contingency plans for a possible new wave of COVID-19 cases.
Market sentiment could change quickly next week if OPEC+ decides to cut daily production at its December 2 meeting.