Oil: Further downside in the short-term would not be a surprise – Rabobank

Analysts at Rabobank continue to see speculative long liquidation pressuring crude oil prices lower as momentum and trend indicators turn bearish and implied volatility spikes on the rapid decline.

Key Quotes: 

“Oil prices were on the defensive again this week as fears surrounding the coronavirus and its impact on oil demand remain front and center.”

“Brent crude oil has shed nearly 20% from its early January highs as a result and is now trading at its lowest levels of 2020 and firmly below the psychological $60/bbl mark. We continue to see speculative liquidation pressuring prices lower as momentum and trend indicators turn “bearish” and implied volatility spikes on the rapid decline. The move appears overdone on a fundamental basis to us given the sharp drop in oil supplies out of Libya that has coincided with the virus outbreak.”

“Libyan production is down nearly 1mb/d which is far greater than most demand loss estimates related to the virus. As such, the price impact has been more sentiment driven in our view but at the same time there is nothing to stop prices from falling further as market flows are overwhelming bearish in the near term.”

“The US Department of Energy inventory report provided more bearish inputs for the oil market as the report showed crude inventories climbing higher week-on-week and perhaps more importantly, the report showed gasoline stocks setting a new all-time record high. The inventory data was not all bearish though as crude stocks in the US remain in a year-on-year deficit and crude exports remain at healthy levels.”

“Looking forward we expect to see further selling pressure from speculative “long” liquidation that will likely cap the market in the short-term. We continue to view the impact from the drop in Libyan crude supplies as outweighing the demand impact from the coronavirus, however, we recognize that fear has overtaken the market and is driving the price action and not rational thoughts. We also expect that positive roll-yield will continue to provide a tailwind for the oilbulls and has the potential to deliver significant returns in 2020 just as it did in 2019.”