Oil Won’t Stage A Meaningful Rally Until This Happens

Crude oil futures are trading higher for the week, but Friday’s steep sell-off is threatening to erase all of those earlier gains. After reaching a one-month high on Thursday, prices are getting hit hard ahead of the weekend as investors continue to express concerns over demand growth after weak Asian economic data fuelled uncertainty about the region’s economic outlook. Furthermore, traders continued to grow impatient with OPEC+’s inability to make a decision about additional production cuts.

Despite Thursday’s friendly U.S. Energy Information Administration (EIA) Weekly Inventories report, prices turned lower on rising market uncertainty, suggesting that traders feel there is just too much risk in the market at this time to hold profitable long positions over the weekend.

The news wasn’t all bearish this week. Three factors contributed to this week’s earlier strength. They were fresh stimulus from China, a drop in new coronavirus cases at the epicenter of the outbreak and supply concerns in Venezuela and Libya.

China Cuts Benchmark Lending Rate

China’s more to cut its benchmark lending rate on Thursday helped ease worries about slowing demand in the world’s second-biggest oil consumer and largest crude oil importer. The move came as no surprise since it was already priced into the market. Earlier in the week, China’s central bank made moves that set up today’s rate cut.

Furthermore, the reaction to this news may have been muted because it takes time for the change to circulate through the economy. Secondly, the number of factories open for business is still low so it’s difficult to see demand stabilizing at this time.

Supply Concerns Reemerge

On Wednesday the U.S. sanctioned a trading unit of Russian oil giant Rosneft for its ties with Venezuela’s state-run PDVSA, a move which could choke the OPEC member’s crude exports even further.

At the same time, conflict in Libya that has led to a blockade of its ports and oilfields shows no signs of a resolution.

Cutting supply is nearly always bullish for crude oil prices. In this case, I think the moves are underpinning prices rather than driving them higher. The main driver of the price action, in my opinion, remains speculation that OPEC and its allies will cut production further when they meet in March. The reaction in the market could come sooner if Russia says it will go along with the plan.

Global Officials to Discuss Economic Impact of Coronavirus

Finance leaders from the Group of 20 major economies are set to discuss risks to the world economy in Saudi Arabia over the weekend. On Thursday, the International Monetary Fund said it was too early to tell what impact the virus would have on global growth.

As G20 finance ministers prepared to meet, IMF Managing Director Kristalina Georgieva said she hoped the economic impact of the virus would be “a V-shaped curve” with a sharp decline in China and sharp rebound after containment of the virus. “But we are not excluding that it might turn to be different scenario,” she said.

U.S. Energy Information Administration Weekly Inventories Report

The EIA revealed on Thursday that U.S. crude supplies edged up by 400,000 barrels for the week ended February 14. Analysts were looking for a rise of 3.3 million barrels.

The EIA data also showed a supply decline of 2 million barrels for gasoline, while distillate stocks fell by 600,000 barrels. Analysts were expecting a 300,000 barrel increase in gasoline supplies, but distillates were forecast to fall by 1.6 million barrels.

Weekly Fundamental Forecast

The weakness at the end of the week suggests traders aren’t going to wait for the IMF to get the data it needs to say the global economy will weaken from the impact of the coronavirus. Furthermore, just last week, OPEC and the International Energy Agency predicted lower demand.

Traders are likely to keep pressure on crude oil because of an expected supply surplus in the first quarter and the need for OPEC+ to take further action at their meeting in early March. Furthermore, the rapidly rising U.S. Dollar is likely to lead to a drop in demand for dollar-denominated crude oil.

Last week, oil traders thought additional production cuts from OPEC+ were imminent, but Russian Energy Minister Alexander Novak dampened those thoughts on Thursday when he said that global oil producers understood it would no longer make sense for OPEC and its allies to meet before their gathering.

Weekly Technical Analysis

The main trend is down according to the weekly swing chart. A trade through $49.50 will signal a resumption of the downtrend. The main trend will change to up on a trade through $64.99. This is highly unlikely but there is room for a normal 50% to 61.8% retracement.

The short-term range is $45.92 to $64.99. Its retracement zone at $55.46 to $53.20 is the first resistance layer. This zone stopped the buying earlier this week at $54.66.

The minor range is $64.99 to $49.50. Its 50% level at $57.24 is the primary upside target.

The first leg up from the recent steep break is $49.50 to $54.66. Its 50% level or pivot is $52.08. This is the level that traders will be watching next week.

Weekly Technical Forecast

Based on this week’s price action, the direction of the April WTI crude oil market the week-ending February 28 is likely to be determined by trader reaction to the 50% level at $52.08.

Bullish Scenario

A sustained move over $52.08 will indicate the presence of buyers. This could lead to a test of the short-term Fibonacci level at $53.20. Overtaking this level will indicate the buying is getting stronger.

Taking out the high at $54.66 will shift investor sentiment to the upside. This could trigger a rally into the short-term 50% level at $55.46.

If $55.46 is taken out by strong buying then look for traders to challenge the 50% level at $57.24.

Bearish Scenario

A sustained move under $52.08 will signal the presence of sellers. If this move creates enough downside momentum then look for a retest of the main bottom at $49.50.

The main bottom at $49.50 is a potential trigger point for an acceleration to the downside with the next major target coming in at $45.92.

Side Notes

Unless OPEC+ surprises with an early announcement of additional production cuts, prices are likely to remain under pressure next week. Furthermore, the coronavirus outbreak has to stabilize before traders gain enough confidence to sustain a rally.