WHY OIL DEMAND AND SUPPLY HAVE BEEN HIT HARD BY THE CORONAVIRUS?

The fundamental law of supply and demand has been known as the primary factor determining the price of black gold. The crude oil market is highly sensitive to the smallest disturbance in this fundamental. There is a well-known quote that says: “The oil market is especially sensitive even to a hint of expansion or contraction in either supply or demand.”

Now, with the spread of the coronavirus happening almost with the Lunar New Year holiday; the Chinese government has been gotten by surprise, where one of the largest global economies, to prevent and control the outbreak has called to shutdown its industrial park and lockdown Wuhan – a city of 11 million habitants – to cope with the virus.

As a result, factories, offices, shops, schools remain shut, having a considerable impact on the World’s biggest importer of crude oil, which usually consumes 14 million barrels per day, now needs a lot of less fuel. Reports have confirmed a plunge of crude oil consumption by 20%, the equivalent to the UK and Italy’s oil needs. It is also worth to mention the more significant impact caused is on the jet fuel demand with airlines around the World canceling flights to China.

The scale of the impact has brought SINOPEC (Asia’s largest refiner) to slash their daily output to 600,000 barrels per day, the most significant cut in more than a decade. The coronavirus has shocked the energy market, with the most prominent and fastest disruption in demand ever seen.

Now without any further ado, let’s read the charts. Technically speaking, the price action was able to reach a key support level at the 49$ handle, a level from January the 7th 2019, signaling a small correction with a pullback from the support, holding above the 50$, recording a 24% drop from this 2020 peak. MACD continues its bearish bias with a Stochastic living in the oversold zone. With the 20 and 50 EMA sloping down and price action overextended from them. The market should experience the most needed correction. However, with too many uncertainties still permeating the air, the market has recorded two consecutive sessions with spinning top candles.

The crude oil market will remain looking for confirmation; as commented last week, OPEC+ steeped in. Calls have been held, and not confirmed proposals are penetrating the media; apparently, the cartel wants to push a 600,000 barrels per day oil output cut to start immediately and extended until June; however, investors are still waiting for further confirmation from the cartel’s members.

Let’s stay in the “wait-and-watch” mode until further notice. Happy weekend ahead. See you next Friday.