Oil prices drop on new coronavirus cases and increased supply concerns

By: Michael Harris
Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to Invezz. His… read more.
on Sep 27, 2020
  • Fuel consumption in the U.S. is still weak as the pandemic hinders travel and economic recovery
  • The number of new COVID-10 cases worldwide surged this week
  • Oil buyers will aim to test $42.30 again after managing to secure a close above $40.00

Crude oil prices continued to trade sideways this week as the buyers struggled to cope with an increase in the number of new coronavirus cases worldwide.

Fundamental analysis: COVID-19 infections rising

The number of COVID-10 cases surged in the United States, particularly in the Midwest and New York City, which is considering restoring shutdown mandates. The virus has taken over 200,000 lives in the U.S. so far.

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“There is this second wave of fear overhanging the oil market at this point and that’s holding us back,” said Phil Flynn, senior analyst at Price Futures Group in Chicago.

Fuel consumption in the country is still weak as the pandemic hinders travel and economic recovery. The 4-week average demand of gasoline was 9% lower compared to the year-ago period.  

Output of crude oil in India plunged by 26% in August compared to a year ago, largely because of the pandemic that is obstructing industrial and transport operations.

Furthermore, new crude oil entering the markets could result in increased supply and lower prices. The U.S. oil and gas rig count climbed by 6 to 261 in the week to September 25, according to Baker Hughes Co.

Libya has stepped up production while Shell has temporarily reserved the first crude tanker to load Zueitina terminal in Libya. Elsewhere, Iranian oil output has significantly increased in September in spite of U.S. sanctions.

Technical analysis: Sideways action continues

Crude oil prices closed the week 1.92% lower, a week after gaining nearly 10% to close above the $40 mark. What’s important for the buyers is that weekly close occurred above both the 100-DMA and 200-DMA.

Crude oil daily chart (TradingView)

The bulls will now hope that this bullish close will be enough to make more sustainable gains this week. Oil buyers will aim to test $42.30 again, while the confluence of two daily moving average lines near $39.00 will provide support. 

Summary

Oil prices declined almost 2% this week as the number of new Covid-19 cases surged globally and due to the expected increase in oil supply in near future.

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