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Oil markets look vulnerable to coronavirus shock

HYCM

By Giles Coghlan, Chief Currency Analyst at HYCM

Oil trying to bounce

The crude complex has tried to bounce as investors generally take the view that the coronavirus will be contained. Looking at US crude below you can see that support was found at the key daily level around $50. However, with Apple issuing a profit warning due to the coronavirus, this is a reminder that there may still be a sting in the tail from the virus fall out that could hit oil.


There had been some expectation last week that Russia would agree to OPEC+ cuts of 600K, but that hope has now faded. Russia needs oil at about $40 a barrel vs Saudi needing oil prices around $80 a barrel to balance their budgets, so Russia will only move on production cuts if they really see the need. Right now, they are happy to ride out the coronavirus, if possible.

Here are two factors that could weigh on oil further if Apple’s move prompts a defensive turn today:

1. Kuwait and Saudi Arabia are due to resume production today from their shared neutral zone fields.

2. Libya still has ports closed which have reduced its oil output by around ~1m/b. Production levels are currently around a tenth of normal levels, but if the closed ports re-open then oil will be pressured with the knowledge of the extra supply.

For today, expect sellers on oil retracements, but also watch out for a deeper fall if we start to get more news on the impact of Chinese supply chains being hit.


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