Crude oil prices likely to face resistance at $58/bbl on coronavirus fears

The onset of the Coronavirus had pushed crude oil prices in a bear phase this year. Typically, a bear market is defined as a fall of 20 per cent or more from the high. The WTI Crude fell from a high of $65.65 a barrel in January fell to a low of $49.31 on February 4, translating into a fall of 24.88 per cent.

Crude oil prices declined as global investors and traders weighed the effects of spreading coronavirus, which has dampened demand for oil from China, world's second top consumer.  As per Bloomberg estimates, China's crude oil demand is expected to fall by nearly 3 million barrels per day (mbpd), which is nearly 20 per cent lower from the current requirement of 15 mbpd. This fall prompted the OPEC to call an emergency meeting to decide on further cuts from its 2.1 mbpd output, which comprised of 1.7 mbpd cut by OPEC+ and a voluntary cut of 0.4 mbpd by Saudi Arabia.

The OPEC+ nations have agreed to cut crude oil production by further 0.6 mbpd in the Joint Technical Committee (JTC) meeting held on 5th Feb 2020 in Vienna. The OPEC+ nations are scheduled to meet again on March 6, where they may make final decision as Russia, which is still in a dilemma weather to support the agreed output cut of 0.6 mbpd. If Russia agrees to cut production, crude oil is likely to rise from the current $53.8 a barrel.

That said, the blockade of ports and oil fields in Libya have curtailed the daily oil output to 0.78 mbpd in January from 1.15 mbpd. The production may dip further to 0.45-0.25 mbpd if the situation remains unresolved.

We believe the recent US sanction on Rosneft will have a minimal impact on oil prices. However, short-term speculative gains are not ruled out yet as major buyers of Venezuelan oil have already shifted to other sources.

Since the last three days, the number of new infections have been falling, which has lit a fire under crude. The easing worries on coronavirus may boost investment sentiment with China pledging more stimulus to revive economy from virus impact. We expect crude oil prices to rise in the short term, but are likely to run into a resistance at $58/barrel.

We believe, the problem with Crude Oil is not supply but demand. This is going to weigh on the crude oil producers. And, demand from cars is certainly reducing the world over.

The writer is the Head - PCG & Capital Market Strategy, HDFC Securities.

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.