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Oil Price Fundamental Daily Forecast – Coronavirus Quarantines to Drive Down Energy Demand

The lack of follow-through to the upside following Thursday’s technical bounce suggests the absence of buyers, since the move was likely fueled by profit-taking and short-covering.
James Hyerczyk

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging lower on Friday, shortly before the regular session opening. The markets are also headed for a steep weekly decline as concern that a virus in China may spread, hurting travel and fuel demand, overshadowed supply cuts. China is the world’s second largest oil consumer so any slowdown in travel would show up on demand forecasts.

At 12:30 GMT, March WTI crude oil is trading $55.52, down $0.07 or -0.13% and March Brent crude oil is at $61.87, down $0.17 or -0.23%.

Coronavirus Update – Impact on Transportation and Crude Oil Demand

The deadly pneumonia-like virus was first identified on December 31 in the Chinese city of Wuhan in Hubei province. It has since spread beyond Wuhan, which has a population of 11 million, to other major cities such as Beijing, Shanghai, Macao, and Hong Kong.

Multiple cases of the virus has been confirmed in Thailand, Vietnam, South Korea and Japan, while the United States, Taiwan and Singapore have each reported one case

The lockdowns is what should concern oil traders since they will have an impact on demand.

As of Friday, 10 cities were put under lockdown measures with a total of about 33 million people. Transportation services in Wuhan, the epicenter of the virus, were shut down on January 23 and people were asked to not leave. The airport and train station in the city were also temporarily closed.

Other cities under lockdown include Huanggang, Xiantao, Exhou, Qianjiang, Zhijiang, Chibi and Lichuan. The combined population in those cities is approximately 24 million people. Authorities have also canceled Lunar New Year events in Beijing and other places. Airlines and rail operators are offering, refunds on domestic flights and train tickets around the country.

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US Energy Information Administration Weekly Inventories Report

Some of the selling pressure on oil was reduced on Thursday after weekly data from the U.S. Energy Information Administration (EIA) showed that U.S. crude supplies fell by 400,000 barrels for the week-ended January 17. Analysts were looking for a drawdown of 100,000 barrels to a 500,000 barrel build. Earlier in the week on Wednesday, the American Petroleum Institute reported an increase of 1.6 million barrels.

The EIA data also showed a supply build of 1.7 million barrels for gasoline, but distillate stocks declined by 1.2 million barrels. Traders were pricing in an increase in supplies of 3.3 million barrels for gasoline and 1.6 million barrels for distillates.

Daily Forecast

The lack of follow-through to the upside following Thursday’s technical bounce suggests the absence of buyers, since the move was likely fueled by profit-taking and short-covering.

Fear and uncertainty from the spread of the virus could lead traders to future reduce long positions and generate more short positions ahead of the weekend.

Furthermore, with more than 30 million people quarantined in China, demand for energy is already dropping and likely to continue to move lower if the problem spreads throughout Southeast Asia.

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