Oil has been under continued pressure lately on coronavirus fears. The concern has been that a global pandemic will restrict the demand for oil. Less construction, cancelled flights, reduced tourism, and cities on lockdown would all dampen the need for oil. This has, on top of an already well-supplied oil market, caused oil to fall, as you can see in the chart below.
However, it is worth being aware of three factors that could support oil in the medium term:
- There is a desire for by the OPEC-Russia partnership to agree to longer production cuts. These may even extend to 2020. Saudi Arabia always has the potential to talk up the price of oil by hinting at potential further cuts. On Monday the Saudi and Russian leaders held a rare phone call and confirmed that they were ready to ‘continue co-operation within OPEC+’. This phone call has probably brought some relief to oil bulls after US crude fell under $50 yesterday. OPEC is said to be considering an emergency meeting on 14th-15th to discuss the impact of the coronavirus on oil prices.
- The People’s Bank of China is offering support when trading begins again on February 03 for local assets. So, this boost from the PBOC could well translate into a risk-on mood for US oil. However, Chinese demand for oil has already dropped 3m bpd on reduced movement because of coronavirus fears.
- The geopolitical difficulties in Libya have halted production due to the shutting of oil ports, causing upward prices to climb. If this production was to restart then around 1m bpd would come back online and put further downward pressure on oil.
US oil breaks through daily support
US oil broke through key daily support level yesterday which would indicate lower prices are ahead. However, if coronavirus fears start to recede, then expect oil to be bought on a return to risk-on growth.