Oil Demand Decimated by Covid-19 Disruption

Following the mild recovery seen in WTI price action last week, momentum has stalled with oil prices trading roughly flat so far on the week. The main driver for oil prices remains the ongoing COVID-19 situation. While risk assets, generally speaking, have been able to reclaim some higher ground over the last fortnight, the moves have been more limited in oil.

The loss of activity around the globe, as a result of the shutdowns in place to help stop the spread of the virus, has caused a severe weakening in demand for oil. With many European countries, as well as the US and parts of the Middle East implementing shutdowns, the hit to the global manufacturing and trade sector has been decisive. Furthermore, with most lock-downs looking likely to be extended until at least the end of April, the hopes of recovery in the near term have been muted.

EIA Reports Record Inventories Build

The latest report from the EIA this week provided a bleak insight into this loss of demand. The EIA reported that demand for US weekly demand for US fuel dropped by a record amount last week while US oil inventory levels increase by a record 15.2 million barrels. Most interesting to read, however, was the reaction by the oil industry there with refiners now operating at around three-quarters of their total capacity. The reduction in operations there explains why the report was not met with a large sell-off.

OPEC Meeting In Focus

The reduction in output at this stage is helping to offset the more negative forces in oil, as too is the expectations of action from OPEC. OPEC is currently undertaking an emergency meeting aimed at agreeing production cuts between itself and non-OPEC members. Earlier in the year, Russia refused to join OPECs plan to reduce production by a further 1.5 million barrels per day. However, with oil prices having sunk even further since then, there is a hope now that Russia will agree to terms. President Trump had touted oil cuts of as much as 15 million barrels per day and though such a deep level of cuts is unlikely, at this stage, news of any action should help provide support for oil prices.

Technical View

Oil ( Bullish above $29.40)

From a technical viewpoint. Oil prices continue to oscillate around the $26.05 level 2015 lows, capped by the local bearish trend line from February highs.  This is a major long-term level for oil and a break back above here could establish a medium term base. However, with VWAP still negative, bulls will need to see price quickly back above the monthly pivot at $29.40 to alleviate the near term bearish bias.

The Crude Chronicles - Episode 33

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