Soaring Number Of COVID Cases Caps Oil Prices

U.S. West Texas Intermediate crude oil futures are trading nearly flat on Friday while heading for their first weekly losses in three. The market is feeling pressure from both the demand and supply sides, led respectively by surging coronavirus cases in the United States and Europe, and Libyan output increases.

COVID-19 Update - Euro Zone Business Activity Shrinks

Several U.S. states reported record daily increases in infections on Thursday, raising concerns about future fuel demand, while France extended curfews for about two-thirds of its population as the second wave of the pandemic sweeps across Europe.

In related news, economic activity in the Euro Zone shrunk in October as coronavirus restrictions returned to the region, preliminary data showed on Friday.

The flash Euro Zone PMI Composite Output Index, which looks at activity in both manufacturing and services sectors, dropped to a four-month low in October to 49.4, versus 50.4 in September. A reading below 50 represents a contraction in activity.

The latest figures showed that manufacturing has remained somewhat resilient over the last month, but activity in services has fallen to a five-month low.

The latest numbers coincided with a period of new restrictions across the Euro Zone as it grapples with a second wave of coronavirus infections.

Libyan Output on the Rise

Libyan output, which had been mostly offline since January due to unrest, has reached 500,000 barrels per day (bpd) and will rise further by the end of October.

"After years of setbacks and false starts, Libya is back in the oil game. A stalemate between the armed forces battling to control the OPEC nation has led to an uneasy truce, and most fields and ports shuttered amid the fighting are operating once again," Bloomberg wrote.

"A blockade of many of the country's energy facilities ended last month, and the state energy firm National Oil Corp. is ramping up production faster than many analysts expected. Output reached 560,000 barrels a day on Wednesday, a person with knowledge of the matter said, up from 150,000 in September," Bloomberg reported.

Analysts at Bloomberg Intelligence see overall production reaching 1 million barrels a day by year-end.

US Energy Information Administration Weekly Inventories Report

U.S. crude oil and distillate inventories fell last week, while gasoline stocks rose in another weak showing for fuel demand, the Energy Information Administration (EIA) said on Wednesday.

Crude inventories fell by 1 million barrels in the week to October 16 to 488.10 million barrels, in line with analysts' expectations in a Reuters poll.

Distillate stockpiles, which include diesel and heating oil, fell by 3.8 million barrels to 160.7 million barrels, more than double the forecast for a 1.7 million-barrel drop, the EIA data showed.

U.S. gasoline stocks rose by 1.9 million barrels in the week, the EIA said, compared with expectations for a 1.8 million-barrel drop.

Refinery runs and crude production both fell sharply, however, which analysts attributed to ongoing disruptions from Hurricane Delta. Production of crude fell sharply last week to 9.9 million barrels per day from 10.5 million bpd, which was in part due to offshore facilities shutting for part of the week due to the hurricane.

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 $36.93 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.

The new minor range is $44.33 to $36.93. Its 50% level at $40.63 could develop into a key pivot level.

Weekly Technical Forecast

Based on the price action the past three 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

We're expecting more sideways price action and would be surprised by a substantial price surge, given the second wave of the pandemic, the slowdown in demand recovery, rising Libyan output, and the chances of an OPEC production increase in January 2021.

Coronavirus-led demand issues and the threat of a supply glut should be enough to cap gains over the short-term although we could see a short-covering spike to the upside if Washington policymakers reach an agreement on fiscal stimulus.

The major resistance zone remains $42.41 to $46.45. We're pretty confident that the latter is the trigger point for a major acceleration to the upside, but we don't have confidence that the fundamentals will shift enough over the short-run to fuel a breakout over this area.