Crude Under Pressure as Coronavirus Fears Grow

Crude has lost ground on Friday. U.S. crude oil is trading at $52.21, down $0.69 or 1.37% on the day. Brent crude oil is down sharply, trading at $57.22, down $1.93 or 3.26%. U.S. crude is down 3.6% this week and have plunged 14.5% in the month of January.

Coronavirus Jitters Return to Markets

Global markets settled down in mid-week, but fears over the coronavirus have returned, which has weighed on oil prices. The coronavirus has now exceeded the human toll of the SARS virus – this outbreak has killed 170 people in China and afflicted 8,000 others. Global businesses have shut their operations in China, and many airlines have reduced or canceled their flights to Chinese destinations. The virus is expected to take a toll on the Chinese economy, and there are fears that China could use this as a pretext to opt-out of its commitment to purchase more U.S. farm goods, as part of the ‘Phase One’ trade agreement. China is the world’s second-largest consumer of oil, so the disruption to China’s economy has already sent oil prices lower and the downward trend is could well continue next week.

Fed Commits to Higher Inflation

The Federal Reserve stayed on the sidelines at this week’s rate meeting, holding the benchmark rate at a range between 1.50% and 1.75%. Policymakers did make a minor technical move, raising the IOER rate (interest rate on excess reserves) by 5 basis points, to 1.6%. The IOER is an additional tool that the Fed uses to manage monetary policy. Fed Chair Jerome Powell sought to reassure the markets that it was monitoring the coronavirus outbreak. Powell also addressed low inflation levels, saying that he anticipates inflation levels rising closer to the Fed’s target of 2 percent “over the next few months.” Powell added that the “Fed is determined to avoid inflation persistently running below 2%.” This appears to be a hint that rate-setters could hike rates in the near future in order to lift inflation levels.

Technical Analysis

The trend for crude remains down. On the downside, there is pressure on support at the 52.00 line, which was tested on Thursday. The next support level is at 51.50. On the upside, 53.50 is the next resistance line. Above, we find resistance at 55.20.