Oil is set for its worst week since the financial crisis. I will freely admit that that has taken me somewhat by surprise, but then as a logical person, illogical panic usually does. That is what this is. Coronavirus is real and could be pretty bad, but is it really going to do enough damage to oil demand to justify a one-week decline of fifteen percent in crude? Or, is it just the market version of the kind of stupidity that leads to forty percent of America beer drinkers avoiding Corona because of the virus?
I am inclined towards the latter, but that doesn't mean that it is time to jump in and buy…yet.
There is an oft-quoted traders' saying that the market can stay illogical a lot longer than you can stay solvent, and that is relevant here. Panic is a powerful thing, despite its inherent lack of logic.
Still, the history of these things, think H1N1, Ebola, MARS, SERS, etc., tells us that at some point things will return to normal and a big chunk of the losses will be regained. It is worth starting to look for levels at which that might happen.
The first of those is if WTI gets to around $42.
The chart shows that there have been two occasions over the last three years when WTI has challenged that level after big drops, then bounced back. That makes it a strong support, but are technical factors like that enough in this environment?
They could be, so it will be the first level to look at should we get there. If you are to do…
Oil is set for its worst week since the financial crisis. I will freely admit that that has taken me somewhat by surprise, but then as a logical person, illogical panic usually does. That is what this is. Coronavirus is real and could be pretty bad, but is it really going to do enough damage to oil demand to justify a one-week decline of fifteen percent in crude? Or, is it just the market version of the kind of stupidity that leads to forty percent of America beer drinkers avoiding Corona because of the virus?
I am inclined towards the latter, but that doesn't mean that it is time to jump in and buy…yet.
There is an oft-quoted traders' saying that the market can stay illogical a lot longer than you can stay solvent, and that is relevant here. Panic is a powerful thing, despite its inherent lack of logic.
Still, the history of these things, think H1N1, Ebola, MARS, SERS, etc., tells us that at some point things will return to normal and a big chunk of the losses will be regained. It is worth starting to look for levels at which that might happen.
The first of those is if WTI gets to around $42.
The chart shows that there have been two occasions over the last three years when WTI has challenged that level after big drops, then bounced back. That makes it a strong support, but are technical factors like that enough in this environment?
They could be, so it will be the first level to look at should we get there. If you are to do that, though, a cautious approach is advisable. A small position can always be added to if a bounce comes and a tight stop can be moved in the same scenario, but both will help guard against futures crashing through the mark. That is always possible in an all-out panic when even the strongest technical signals get ignored.
Whether that holds or not, the best chance of a long-term momentum shift will come if there is a change in fundamental conditions that change sentiment. That will only really come when the headlines fade, but in the meantime, OPEC+ may provide some support that could help to form a bottom.
They are scheduled to meet next week, and there are already reports that a much deeper cut to output is being considered.
As helpful as that would be, this is another case where jumping in too soon is not a good idea. OPEC frequently try to talk their book in advance, but in a situation like this, talk alone won't stem the selling. Real action, however, might. If we assume that this will go the way of the other health scares and be contained, then forgotten, a production cut that will last much longer than the coronavirus headlines will have a real effect on oil prices.
The ideal scenario for a bullish bounce would be if both things happen at the same time. If OPEC+ does announce further output cuts or a firm commitment to them next week, just as WTI hits that $42 support, there would be a good chance of a rapid, potentially profitable bounce.
Until then, though, predicting the end of the panic is a dangerous game, and not one I am willing to play.
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