How has the coronavirus impacted the price and can we still make money to the upside after the huge bullish rally over the past few months?

The price of oil has been extremely bullish over the past 5 months since the 20th of April when it reached the $0 mark and the short-term futures contract even went to the negative territory.

What was the reason for that huge sell-off on the price?

The main reasons for the huge depreciation on the commodity were the low demand during the coronavirus, as well as the oversupply on the market in the meantime. In fact, the price was trading at the $65 highs on the 8th of January, which was its peak for the year, to reach $0 on the 20th of April. It is important to say that the demand for oil decreased substantially in the first few months of 2020 due to the coronavirus outbreak and the fact that the virus started spreading from China to Italy, then all across Europe towards the United States and then all around the world. Logically speaking, when the countries blocked their borders and closed their airports, as well as cancelling all flights, this had an extremely negative impact on the demand for oil. Furthermore, people all around the world were in a lock down and unable to go to work, drive their cars or travel around at all. In fact, the industrial sector was hit immediately and the construction companies stopped their operations, which also led to a massive decrease in the consumption of oil because all the machinery used in construction, uses oil to operate. On top of that, the production of oil remained very high for a few months until the beginning of May when OPEC+ members agreed to start cutting the daily production by 9.7 million barrels. Yet, their actions took quite longer than expected and traders and investors had been selling oil actively on fears that demand was on record low levels, while the market was extremely oversupplied, leading to a massive sell-off and the price reaching $0 in a short period of time.

In fact, as soon as the virus started spreading around and the price of oil started depreciating quickly, OPEC members made an attempt and proposed to non-OPEC members, such as Russia, to cut oil production in order to support the price. Yet, Russia refused and we saw an immediate further bearish reaction on the price. Actually, the price of oil saw a massive correction from the $65 highs in the beginning of January to the $50 mark a month later. Due to the fact that no deal was reached, the price kept dropping massively to the downside and reached the $20 mark in the end of March to fall further and reach the $0 mark 3 weeks later. It is important to mention here that this is the first time in the history of financial markets when the price of oil reaches $0. In other words, this is a historical event that people will be in reading in books about in the future.
As soon as the price reached the $0 mark, all investors started buying aggressively at that level as they knew an oil production cut had been reached already and it was only a matter of time before the price recovers back to the upside. Well, let’s face it – it wasn’t hard to predict the rise on the price from $0. An immediate bullish reaction followed – the price reached the $21 mark on the next day, followed by a massive bullish appreciation towards the $43.75 mark in the last week of August. Yet, it is important to mention that the price has been struggling to appreciate much further after the huge downside drop early in the year. In other words, since the beginning of June the price has been trading in a range between $40 and the $43.75 it managed to reach 2.5 months later. The reason for that is because traders who managed to benefit from the great correction in April and buy the commodity very low on expectations that the situation with the virus will calm down soon started collecting profits and there was a lack of much further bullish activity taking place. Let’s not forget that the movement from $65 to $0 in a few months and then a massive appreciation towards the $43.75 is something that had never happened before and investors and traders have been making huge profits to the upside.

The main reason for the huge bullish rally on oil was driven by the fact that the situation with the coronavirus improved around June and there have been many countries that started opening their borders back then, allowing people to travel. Moreover, the situation with the virus started improving on a local basis as well – the affections started decreasing and that allowed different countries to let people go back to work and travelling again.

Here we need to say something very important – the market is driven by expectations.

That means as soon as investors read about the good news surrounding the virus and the fact that the situation has started improving, they started buying oil aggressively on expectations that countries will start opening their borders, let people go back to work, businesses will start operating again and all of that would start boosting the demand for oil. That’s why the price kept on rising for 2.5 months since the first week of June and lots of profits have been made to the upside. Yet, due to the massive bullish rally, the technical indicators had gone to the overbought territory and started giving indications for a potential correction in the short-term. Moreover, it was only logical to expect a profit-taking correction after such a massive rally to the upside anyway.

Moreover, the head of the World Health Organization (WHO), Dr. Tedros Ghebreyesus warned in August that the coronavirus could stay around for the next 2 years. At the same time, he talked about the technology they have available to produce the vaccine everybody needs in order to deal with the virus, and that hopefully the virus would be gone sooner than expected. Yet, the market participants were quite cautious when it comes to buying oil above $40 now, especially after the huge appreciation on the price in such a short period of time.

The situation with the virus is extremely important for the future direction of the oil price because of its impact on the demand – in case the coronavirus cases soar again and countries start locking their borders and people stop travelling that would have a very negative impact on the price again.

So, taking all those factors in account, investors were motivated to cash in some profits and wait for another potential buying opportunity at a decent discount.

That’s exactly what happened on the 2nd of September. The price started falling from the $43.20 highs to reach the $36 lows a week later (17% correction).

So, has the right time come to buy oil again?

The coronavirus is still out there and it is quite uncertain what would happen in the next few months. In other words, we need to be very cautious and follow the situation very closely because in case of a second wave and the situation getting worse again, we would expect that to have a decline on the demand for oil again and with the current levels of supply that would have a very negative impact on the price. However, the short-term picture looks different. Investors’ positive sentiment could be seen by the bullish oil price movements in the past 4-5 months, as well as the huge appreciation of the stock market ever since as well.
So, for the time being, unless a second wave of the virus arises, we would be interested in following the trend and taking advantage of that great 17% correction that occurred in the past 2 weeks.

Chart: Crude Oil


Conclusion

Based on all above-stated factors that have an impact on the price, we believe the current correction of 17% in 2 weeks is giving us a great opportunity to buy oil and benefit from the great uptrend that has been going since April this year when oil bottomed out from $0.

Currently, the price is trading at just below $37. The daily chart shows the strong support at $35-$35.50 where lots of buying pressure took place after a bit of a profit-taking correction in the middle of June, followed by a strong appreciation afterwards towards the $41 mark. The technical indicators such as RSI, Bollinger bands and Stochastics have started giving bullish signals and an indication for a very likely price reversal to the upside from those levels.

So, we would be expecting investors to see that 17% correction as a great opportunity to buy at a large discount and make high profits to the upside in the short to middle term. Therefore, we would be opening our buy positions on oil at $36, just above the $35 – $35.50 support. Our first take profit target will be at $40, followed by the next target at $44 where we would be fully closing our buy positions and wait for another correction on the price that would give us a chance to further maximize our followers’ profitability.

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

Sincerely,

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