Crude Recovers After Slipping Below $50 Level
Crude oil prices have bounced back in Tuesday trade. Currently, U.S. crude oil is trading at $51.12, up $1.26 or 2.27% on the day. Brent crude oil is down sharply, trading at $55.20, up $1.08 or 2.00%.
Crude Climbs on U.S. Mfg. Data, OPEC
After a nasty slide, U.S. crude has recovered on Tuesday. Crude had declined by 7.7% since last week, but has reversed directions, with gains of close to 3 percent on the day. There are two reasons for the rebound. First, the U.S. posted unexpectedly strong manufacturing data, which boosted confidence in the U.S. economy. The ISM Manufacturing PMI, a key indicator, rose to 50.9 in January, up from 47.2 a month earlier. This figure beat the forecast of 48.5 points. This marked the first reading indicative of expansion since July. The U.S. manufacturing sector has been depressed for a lengthy period, exacerbated by the U.S.-China trade war. Investors are hopeful that the ‘Phase One’ limited trade accord, under which China has committed to purchase more U.S. goods, will boost the economies of both countries, which are the two largest consumers of oil in the world.
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The second factor which has lifted oil prices was a Reuters report that OPEC members and Russia were considering cutting crude output by a further 500,000 barrels per day due to reduced demand because of the coronavirus. OPEC will be tempted to reduce production, but historically, it has run into difficulties enforcing any agreements to cut output. Reuters also reported that Brian Gilvary, CFO of British Petroleum has estimated that the economic slowdown due to the virus will reduce oil demand in 2020 by some 0.5% of global demand, or between 300 thousand and 500 thousand barrels per day.
Despite the rebound in oil prices on Tuesday, I remain bearish on crude. The Chinese economy in disarray due to the coronavirus, which has not been brought under control. This means less economic activity and lower demand for oil. I expect crude to again test the key $50 level, as early as this week.
Technical Analysis
The trend for crude remains down. On the downside, there is strong pressure at the 51.00 level. Below, there is support at the 50.00 line, which was tested on Monday. On the upside, there is weak resistance at 51.50, followed by resistance at the round number of 52.00. Note that the 50-EMA dropped below the 200-EMA on Friday – this is known as a ‘death cross’ and is considered a bearish signal.