Marius Paun | London, UK | Senior dealer | Tuesday, 30th June 2020
The US oil prices moved down on Tuesday on renewed doubts the V-shaped economic recovery can be maintained. At the same time, a potential increase in crude supply weighed on the energy markets, after Libya state oil company signalled some progress on negotiations to resume oil exports. The country’s National Oil Corp (NOC), who are capable of producing around 1% of global crude, said yesterday that neighbours are close to lifting the blockade put in place early this year.
On Monday strong growth in US home sales boosted hopes that fuel demand remains well supported as major economies reopened after lockdown measures were implemented. In turn that sparked a rally in US crude prices, which gained over 3%, to close at $39.90 per barrel. During the second quarter, US oil prices have nearly doubled.
News that Asia and some European countries economies have reopened kept energy investors optimistic. However lately, the re-emergence of Covid-19 hotspots in the European Union and even China, together with ongoing developments in the Southern USA and Latin America, have dented the prospects of higher oil prices.
The oil major company Royal Dutch Shell announced on Tuesday that it will write down the value of its assets by taking an impairment of between $15-22 billion for 2020, adding the recent increase in crude prices is unfounded. It contrasted with the markets’ optimism of a quick return to global growth. In their view, this optimism might not be based on sound fundamentals but rather on hopes expressed by some banks and institutional investors.
Shell’s statement was pretty much in line with British oil giant BP views last week and may indicate the coronavirus pandemic had a disastrous effect on energy demand across the board. It could slowly become clear for the whole industry that second quarter results could be extremely painful. What’s more, the unexpected and sudden oil demand destruction could have a long-term effect on commodity prices in general. Some analysts went even further saying in the case of Shell that the $15-22 billion write-off, extreme as it may be, could possibly not be even enough and in the coming years that number could rise further.
Travel restrictions between countries could also keep tourism under pressure for quite some time and in turn hurt fuel demand. Whether a geopolitical spat or just self-preservation, it appears ‘the Americans are to remain barred from European travel as the EU reopens its border gradually’ was reported by the media today.
In the meantime, the crude oil storage volumes are still around historical elevated levels which would present a challenge for any rally in prices even if demand would rise significantly. Shell even commented the positives for crude outlook are still ‘very fragile’.
Shell expects crude prices to stay volatile for 2020 given geopolitical unrest. They point out that optimism is a bit misplaced this year and instead believe it should make a comeback in 2021. And the explanation is low investments upstream, large scale shutdowns and potential high-profile bankruptcies.
The chart above shows the short-term moving averages about to cross below the longer-term moving averages which would be a bearish signal. Furthermore, it seems the short-term MA (6 day) started to point downwards. However, for the last month the trend was rather sideways.
On the upside, bulls would need to see a close above resistance at psychologically important $40.00 mark first. That would bring into focus $41.62 the high of 23rd of June. The gap of the 9th of March when US crude prices jumped from $41.08 the low of previous session to reopened at $32.72 on the next one has now been filled. On the downside bears will have their eyes on breaching support just below $38.00 handle. A close below that level could attract additional sellers who will challenge $36.00 where they may encounter strong support.