Russia Is The Critical Factor In Oil Markets Right Now

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher on Friday as investors continue to increase bets that OPEC and its allies will come through with the production cuts a technical committee recommended the week-ending February 7.

The price action also suggests that traders are a little more optimistic that the coronavirus outbreak has reached a peak and that the demand crisis may be ending. The markets are also on track for their first weekly gain since early January.

OPEC Cuts Forecast for Oil Demand Growth This Year

In a closely-watched report published Wednesday, OPEC cut its forecast for oil demand growth this year, saying the coronavirus outbreak was the primary reason.

The cartel said it now expects 2020 daily oil demand growth to be 990,000 barrels per day (bpd), which is 230,000 bpd below prior forecasts.

"The impact of the Coronavirus outbreak on China's economy has added to the uncertainties surrounding global economic growth in 2020, and by extension global oil demand growth in 2020," OPEC said in the report.

IEA Says Virus Outbreak to Shrink First-Quarter Oil Demand

Oil demand is set to fall year on year in the first quarter for the first time since the depths of the financial crisis in 2009 hurt by the coronavirus outbreak in China, the International Energy Agency (IEA) said on Thursday.

"The consequences of Covid-19 for global oil demand will be significant. Demand is now expected to contract by 435,000 barrels per day (bpd) in Q1, the first quarterly decrease in more than a decade," the Paris-based IEA said in a monthly report, using the new scientific name for the virus.

"For 2020 as a whole, we have reduced our global growth forecast by 365,000 bpd to 825,000 bpd, the lowest since 2011," the IEA said, adding that it assumed economic activity from the second quarter would return progressively to normal.

In the second quarter it said it expected oil demand to grow 1.2 million barrels per day before normalizing in the third quarter with growth of 1.5 million bpd on likely economic stimulus measures in China.

Fresh Coronavirus Data Nearly Derailed the Rally

On Wednesday, crude oil jumped more than 3% at the high as traders eyed deeper production cuts from OPEC, and as China reported the lowest number of new coronavirus cases since the end of January, easing concerns about a drop-off in demand for oil.

One catalyst changed on Thursday, however, after China's Hubei province, where the virus is believed to have originated, reported 242 new deaths, double the previous day's toll and the fastest rise since the pathogen was identified in December.

U.S. Energy Information Administration Weekly Inventories Report

The Energy Information Administration (EIA) said on Wednesday that U.S. crude supplies rose by 7.5 million barrels for the week-ended February 7. Traders were looking for a 2.9 million barrel build.

The EIA data also showed a supply decline of 100,000 barrels for gasoline, while distillate stocks fell by 2 million barrels. Traders were expecting gasoline inventories to rise 700,000 barrels, however, distillates were forecast to fall by 900,000 barrels.

Weekly Forecast

The bearish demand forecasts from OPEC and the IEA are likely going to encourage OPEC and its allies, especially Russia, to implement the additional production cuts recommended last week. An OPEC+ technical committee recently recommended expanding production cuts to put a floor under falling oil prices, although there was some resistance from Russia. The major producer said it needed more time, but the new demand forecasts are likely to encourage Russia to sign off on the OPEC+ deeper cut.

Short-covering should drive prices higher if Russia announces it is going along with the output cuts, but gains will be limited since the cuts will not be enough to overcome the demand decline. If Russia passes on the cut, then this will be a disaster. Prices will plunge to multiyear lows.

Weekly Technical Analysis

The main trend is down according to the weekly swing chart. However, the lack of selling pressure under $50.00 suggests it wasn't fresh shorting pressure that drove prices lower the week-ending February 7, but rather sell stops. This made the market ripe for the short-covering rally we saw this week.

A trade through $49.50 will signal a resumption of the downtrend. The main trend will change to up on a move through $64.99. This is highly unlikely even if OPEC+ decides to implement additional production cuts. However, there is room for a normal 50% to 61.8% retracement rally.

The first move up from a major bottom is usually short-covering. In other words, the short sellers have to come out of the market before the new buyers come back in.

The short-term range is $45.92 to $64.99. Its retracement zone at $53.20 to $55.46 is the first upside target. Buyers will have to clear this zone first before we can get excited about a 50% retracement of the entire five week sell-off.

Weekly Forecast

The strength of the April WTI crude oil market the week-ending February 21 will be determined by trader reaction to the short-term Fibonacci level at $53.20.

Bearish Scenario

Sellers could come in on the first test of $53.20 next week. If they can sustain the move then look for a retest of $49.50. The market could accelerate to the downside if this bottom fails. This will likely happen if Russia decides to pass on making additional production cuts.

Bullish Scenario

If Russia decides to go along with OPEC+ and make additional output cuts then look for the market to surge over $53.20. This could create the momentum needed to challenge $55.46. Overtaking this level could lead to a test of $57.24.