Why Oil Prices Continue To Fall

U.S. West Texas Intermediate crude oil futures fell nearly 5% early on Friday after President Donald Trump tested positive for COVID-19 and negotiators failed to agree on a U.S. fiscal stimulus package designed to save the economy by speeding along the recovery. Meanwhile, new data from OPEC showed that rising global output threatens to destroy the weak price recovery.

Trump Tests Positive for COVID-19

The catalyst for the move is the news that President Trump had contracted COVID-19. The news triggered a volatile move in the financial markets and thrust COVID-19 back into the spotlight for investors.

The White House announcement is expected to heighten existing political uncertainty around the U.S. election on November 3, another major risk event for markets. Jeff Henriksen, co-founder, and CEO of Thorpe Abbotts Capital called the president’s positive test a “game-changer” for market behavior in the short term.

House passes $2.2 Trillion Democratic Coronavirus Stimulus Bill

In a symbolic move, the House passed a $2.2 trillion Democratic coronavirus stimulus plan on Thursday night even as Democrats and the Trump administration struggle to strike a relief deal.

The bill likely will not get through the Republican-held Senate and become law. Senate Majority Leader Mitch McConnell has opposed the legislation as his caucus resists spending trillions more on the federal response to the pandemic.

The House Democrats did their part. Now it’s up to the Republicans. The debate isn’t over, but today’s news about Trump’s health may have been a wake-up call to start moving forward.

OPEC Crude Supplies Rise

Crude supplies from the Organization of the Petroleum Exporting Countries (OPEC) rose in September by 160,000 barrels per day (bpd) from a month earlier, a Reuters survey showed.

The increase was mainly the result of increased supplies from Libya and Iran, OPEC members that are exempt from a supply pact between OPEC and allies led by Russia – a group known as OPEC+.

Weekly US Energy Information Administration Weekly Inventories Report

U.S. crude stocks and distillate inventories fell in the latest week as refiners picked up processing rates, though fuel demand weakened, the EIA said on Wednesday.

Crude inventories fell by 2 million barrels in the week to September 25 to 492.4 million barrels, compared with analysts’ expectations in a Reuters poll for a 1.6 million-barrel rise.

Exports rose while imports fell, helping facilitate the drawdown. Net U.S. crude imports fell last week by 536,000 barrels per day, the EIA said.

U.S. gasoline stocks rose by 683,000 barrels in the week to 228.2 million barrels, the EIA said, compared with expectations for a 1.1 million-barrel drop.

Distillate stockpiles, which include diesel and heating oil, fell by 3.2 million barrels in the week versus expectations for a 917,000-barrel drop, the EIA data showed.

The EIA also said refinery crude runs rose by 300,000 barrels per day in the last week, EIA said. Refinery utilization rates rose by 1 percentage points, in the week.

Product supplied, a proxy for fuel demand, dropped in the most recent week, particularly due to a falloff in distillate demand, though gasoline product supplied rose modestly.

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 $25.31 will change the main trend to down.

The minor trend is down. This is controlling the momentum. Friday’s trade through $37.11 signaled the return of sellers. The new 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.

Weekly Technical Forecast

Momentum is controlling the price action rather than price levels. Trader liquidation is driving prices lower, meaning they are looking for value.

Bearish Scenario

If the downside momentum continues through this week’s low (currently $36.93) then look for the selling to extend into the retracement zone at $34.82 to $32.58. This zone represents value and since the main trend is up, buyers are likely to show up on a test of this area.

Bullish Scenario

Given that momentum is trending lower, the market is going to have to take out recent highs to get us excited about its upside potential.

Meanwhile, all we can hope for is new buyers on a test of $34.82 to $32.58. After a successful test of this area, a higher close would be a strong sign that the market has reached an important short-term bottom.

Short-Term Outlook

While we don’t expect crude oil prices to crash as they did earlier in the year since the OPEC+ supply cuts provide a cushion against such a move, we do think that falling demand and rising supply will keep a solid lid on prices, preventing sustained rallies.

Trump’s positive COVID-19 test will heighten concerns about the spread of the coronavirus that could create renewed fears of shutdowns and restrictions.

One concern is that Trump’s positive test will force investors to sit up and take notice that a vaccine isn’t going to be available for some time and that the coronavirus pandemic is likely to linger well into 2021. In other words, conditions are likely to get worse before they get better.

The wildcard that could produce a strong technical bounce in crude oil is the passage of the stimulus package.

Some speculators are rallying around the notion that Trump’s COVID-19 diagnosis could provide the sense of urgency needed for political leaders in Washington to strike a deal on another relief deal.

We like $34.82 to $32.58 for a bottom, but the market will still need a catalyst to drive prices higher. Perhaps it will be a new fiscal stimulus package.