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  • It was an ugly session for WTI, with European demand concerns weighing and technical selling exacerbating things.
  • WTI dropped all the way from above $61.00 to the low $57.00s, falling below its 50DMA at $58.75.

Crude oil markets were hit badly again on Tuesday, with WTI cratering another 6.8% or $4.18 to drop to close Tuesday futures trade at $57.38. The sell-off gained momentum midway through the US session after front-month futures contracts for the American benchmark for sweet light crude oil (WTI) dipped below the 50-day moving average at $58.75. WTI prices have stabilised at the next area of support just under the $57.50 mark (the 9 and 12 February lows). But there isn’t much by way of key technical levels to stop crude oil markets from retracing all the way back to the January highs just under $54.00 – this could be the target for many short-term bears.

Driving the day

Concerns over the near-term outlook for crude oil demand in Europe continue to weigh on crude oil markets; Germany announced a fifth extension of lockdown restrictions while the Netherlands and Norway toughened their virus curbs on Tuesday, as the bloc heads inexorably back into full lockdown as EU nations struggle to contain rising Covid-19 cases being driven by the spread of the more infections (and deadly) UK variant of the virus. Note, this comes after France toughened lockdown rules last week and with most of the rest of the EU (including Italy) also having recently tightened restrictions.

While lockdowns on the mainland will reduce traffic thus hurting crude oil demand via this avenue, UK officials continue to coin the idea of red listing travel to EU nations in the coming weeks. If international travel bans are more sticky than expected this summer, this will be a blow to jet fuel demand recovery hopes, which of course also hurts crude oil.

Rystad Energy’s head of oil markets remarked to Reuters that “the road to oil demand recovery appears to be full of obstacles as the world continues to fight the Covid-19 pandemic”¦ Oil prices are declining again on Tuesday, proving that last week’s correction was not deep enough and that the market had been trading lately with an excessively bullish sentiment, overlooking the pandemic’s risk”.

As a result, moving forward, the path of the pandemic will remain the main driver of crude oil markets; oil will be hypersensitive to any signs of things turning sour in either the US or UK (where vaccine rollouts have been going very well and Covid-19 infection rates are dropping) or in other major economies such as China. The drop in prices is likely to help maintain OPEC+ cooperation, which up until this point has been good, although there were strong signs of some itchiness to start pumping as WTI approached $70 – these calls for higher output will be much weaker now.

Demand-side economic events this week will also be in focus; global PMIs are released on Wednesday, a timely update as to the performance of the global economy in March and could well shift crude oil markets in tandem with broader risk appetite.