Brent crude oil’s six-day drop from $66/b to $58.5/b yesterday was probably accelerated by hedge funds cutting bullish bets. Since early December when OPEC+ extended and deepened production cuts and up until January 21 hedge funds had bought close to 100 million barrels of Brent crude oil. They were left completely unprepared by the sudden change in focus from potential disruptions in Libya and the Middle East to the coronavirus impact on demand for fuel.
Having reduced exposure and after finding support ahead of the October low a $56.50/b we may now have seen the worst part of this adjustment phase. S&P Global Platts Analytics is forecasting a drop of 200,000 b/d in oil demand for the next two to three months. If however the coronavirus is as bad as the SARS outbreak in 2003, they see oil demand falling by 700,000-800,000 b/d, reflecting more than half of the expected demand growth for 2020.
Should the market manage to stabilize over the coming days some attention may return to Libya where the nation’s output could be days from grinding to a complete halt. This according to the head of the National Oil Corp and it comes in response to an escalating crisis which has cut oil production and closed export terminals.
OPEC, increasingly frustrated by the latest slump, stands ready to support the price through extending and potentially making even deeper cuts. For now the market will remain nervous about any further escalation in China and beyond. From a technical perspective support as per the chart below is $58/b followed by the October low at $56.15. In order to attract renewed demand it first need to reclaim $60.50/b.