Will A Vaccine Reinvigorate Oil Markets?

U.S. West Texas Intermediate is trading lower on Friday. The catalysts behind the selling pressure are fears over skyrocketing COVID-19 cases and their negative effect on the global demand recovery. Nonetheless, the market remains on track to finish higher for a second consecutive week, helped by vaccine hopes.

Bullish News

This week's strength was primarily driven by data that showed an experimental COVID-19 vaccine being developed by Pfizer Inc and Germany's BioNTech was 90% effective.

Also providing support was the notion that OPEC+ may delay implementing a planned loosening of output cuts agreed in a deal this year.

Bearish News

An escalation of COVID-19 cases in the United States is taking center stage on Friday. New coronavirus infections in the U.S. and elsewhere are at record levels and tightening economic restrictions to contain the spread have dampened the prospect of a near-term end to the global health crisis.

Additionally, the International Energy Agency (IEA) threw cold water on the vaccine news when it said on Thursday that global oil demand is unlikely to get a significant boost from the rollout of vaccines against COVID-19 until well into 2021.

U.S. crude oil inventories rose unexpectedly last week while gasoline and distillate stockpiles fell, the Energy Information Administration (EIA) said on Thursday.

Crude inventories rose by 4.3 million barrels in the week ended November 6 to 488.7 million barrels, the EIA said, compared with analyst expectations in a Reuters poll for a decrease of 913,000 barrels.

Refinery crude runs fell by 105,000 barrels per day, data showed.

Gasoline stocks fell by 2.3 million barrels, far exceeding analysts' expectations for a 263,000-barrel decline. Distillate fuels stockpiles, which include diesel and heating oil, fell by 5.4 million barrels, compared with expectations for a 1.9 million-barrel drop.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. The trend turned up when buyers took out the last swing top at $41.90, but fell well short of the next main top at $44.33. A trade through $33.64 will change the main trend to down.

The main range is $59.51 to $25.31. Its retracement zone at $42.41 to $46.45 proved to be solid resistance, stopping the rally at $44.33 the week-ending August 28.

The short-term range is $25.31 to $44.33. Its retracement zone at $34.82 to $32.58 is the primary downside target. This zone stopped the selling at $33.64 this week. It remains a major support area.

The new minor range is $33.64 to $43.06. Its 50% level at $38.35 is potential support. Since the main trend is up, buyers are likely to come in on the first test of this level.

Weekly Technical Forecast

Based on this week's price action, the direction of the December WTI crude oil market the week-ending November 20 should be determined by trader reaction to the minor 50% level at $38.35.

Bullish Scenario

A sustained move over $38.35 will indicate the presence of buyers. If this move creates enough upside momentum then look for a retest of $42.41 to $43.06. Taking out this level could extend the move into the main top at $44.33, followed by the major Fibonacci level at $46.45.

Bearish Scenario

A sustained move under $38.35 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend the major support zone at $34.82 - $32.58. The latter is also a potential trigger point for an acceleration to the downside.

Short-Term Outlook

When we look back at this week, the off-setting news stands out.

On Monday, we saw positive vaccine news and the hopes of the economy returning to pre-pandemic levels sooner than expected, help drive prices to their highest level since September 2. Then we spent the rest of the week worrying about the logistics of getting the vaccine administered in a timely manner. This concern raised doubts over whether the market could avoid a supply glut by the end of the fourth quarter.

This week's inventory reports also offset each other. Late Tuesday, the American Petroleum Institute's weekly inventories report showed a crude stockpile decline of 5.1 million barrels. But Thursday's EIA report showed a bigger than expected increase in stockpiles, while traders were looking for a drawdown.

Finally, early in the week, prices were supported by the news that OPEC+ was likely to delay tapering its planned production cuts, but by Friday, traders were saying the market has largely discounted the move.

At the end of the week, we've concluded that oil will have a hard time breaking out to the upside as long as the pandemic is escalating, health officials are warning that conditions will worsen in the U.S. and Europe and there are lingering concerns that the crude oil market is unlikely to see any benefit from a COVID-19 vaccine for several months.

U.S. Federal Reserve Chairman Jerome Powell summed up our outlook best when he warned Thursday that the "next few months could be challenging" despite recent developments on the vaccine front.

"From our standpoint, it's just too soon to assess with any confidence the implications of the news for the path of the economy, especially in the near term," Powell said regarding the vaccine.

That sounds bearish to me.