OIL FORECAST: CRUDE OIL PRICE ACTION FIXATED ON GLOBAL GDP GROWTH OUTLOOK IMPACT FROM NOVEL CORONAVIRUS OUTBREAK
- Crude Oil clung onto a critical technical support level to record its best weekly gain since early December after its recent plunge into bear market territory
- WTI and Brent Oil prices may possibly rebound higher if estimates for global GDP growth stabilize after slipping in response to the economic toll from the novel coronavirus outbreak
- The possibility for a broader rebound in crude oil price action likely hinges on trader sentiment and the growth rate in number of confirmed cases of COVID-19 with most of China on lockdown
The price of crude oil jumped nearly 6% off its February lows last week after the commodity found technical support around a multi-year uptrend line and key level of confluence.
This is subsequent to a major selloff in oil prices, however, which pushed WTI into a bear market to start the year with a decline of more than 20% from its January high.
CRUDE OIL PRICE CHART: DAILY TIME FRAME (JUNE 2019 TO FEBRUARY 2020)
I noted in a recent oil forecast that the major selloff in crude oil and movement into safe-haven assetsis primarily attributable to resurfacing global growth fears, which stem overwhelmingly from the spread of a new coronavirus.
Formally named as COVID-19 by the World Health Organization, the novel coronavirus outbreak is curbing economic activity – particularly in China – and weighing negatively on demand for crude oil.
Meanwhile, crude oil price action has largely crumbled amid the revival of volatility and risk-aversion across the broader market.
CRUDE OIL PRICE CHART & OIL VOLATILITY (OVX) OVERLAY: DAILY TIME FRAME (FEBRUARY 2019 TO FEBRUARY 2020)
Oil volatility – measured using Cboe’s OVX Index – has receded from its early February high as market sentient begins to recover from its adverse knee-jerk reaction as China takes aggressive measures to curb the coronavirus.
With preliminary sings that the growth rate in confirmed number of coronavirus cases is decelerating, the long-term economic impact could be minimal despite the recent stretch short-term turbulence and likely impact on first quarter GDP and oil demand.
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In turn, crude oil prices may be primed for an extended recovery so long as there is no destabilizing development like a sharp and unexpected spike in reported coronavirus cases or fatalities.
CRUDE OIL PRICE CHART & US TREASURY YIELD CURVE (10Y-03M) OVERLAY: DAILY TIME FRAME (APRIL 2019 TO FEBRUARY 2020)
Along with volatility, investor sentiment can also be quantified roughly by the US Treasury yield curve, which inverted again earlier this year for the first time since last October.
Seeing that an inverted yield curve is believed to foreshadow a forthcoming recession by many market participants, its recent return to negative territory was unsurprisingly correlated to the slide in crude oil prices to a strong degree.
On that note, the three-month and 10-year Treasury yield spread has recovered back into positive territory recently and appears to have corresponded with a rebound in crude oil prices.
Additional fundamental themes that may bolster crude oil price action include potential OPEC intervention and lingering Middle East uncertainty.
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OPEC might act to cut crude oil production in aims of rebalancing supply with the recent demand shock while next week’s Iran election could bring more hardliners into power and re-stoke concern over Iran-US tensions.
Nevertheless, it seems as though coronavirus fears continue to linger and may continue dominating markets and likely stands to strong-arm the direction of crude oil.
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