Market Overview

29 January 2020

Oil Resiles Virus Fears

Brent oil bounced from $58 a barrel, an October 2019 low, where it plummeted from $66 a barrel on Jan. 20 amid coronavirus fears. The sharp drop in oil prices emerged on concerns that demand for oil could drop because market demand will become weaker. However, the negative effect on the world economy due to the virus could be overestimated so far. Thus, an emotional pressure on oil prices could be seen as too excessive. More objective support factors could gradually affect the price of oil.

OPEC wants to extend current oil output cuts until at least June, according to Reuters. Additional cuts might also be on the agenda if oil demand significantly shrinks and prices continue to fall. Barclays forecasted a decline in oil demand from 600,000 to 800,000 bpd in the first quarter of 2020 and as much as 200,000 bpd for the whole of the year. OPEC could act according, with Libya supplies suspension easing the scope of additional cuts

China is well organised to tackle the virus and the swift efforts of the Chinese government has limited the spreading of the virus.

Moreover, the Federal Reserve (Fed) is expected to maintain dovish rhetoric after its meeting on Jan. 29.

The continuation of loose monetary policy by the Fed may give an additional positive sign to the commodities market.

The price of oil is now cautiously moving up and may continue to extend above $59 a barrel. Nevertheless, it is too early to treat this move as a full-fledged correction, but it could perhaps be considered as a temporary break in downward movement of the oil price. Technically, if the support factors are sustained and no further negative news about the virus surfaces, the price may continue to rise to the next resistance levels of $62-63. But even in this case, the general downward trend may continue to evolve. This trend may be flipped once the Brent price consolidates above $66.1 a barrel.

If the virus spreads uncontrollably, this may cause unforeseen consequences and other risks may escalate matters further. This may cause Brent prices to continue to slide to technical support levels of $56.2-$57.4 a barrel.

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