WTI oil crashes 20%! Will the coronavirus outbreak push it lower?

January 27, 2020 14:14

The price of WTI (West Texas Intermediate) crude oil - a benchmark for global oil prices - has been on the back foot since the start of the year. It is down nearly 20% in the third week of January alone - even after the Organisation of Petroleum Exporting Countries (OPEC) announced they will cut oil production by an additional 500,000 barrels per day (on top of the 1.2 million barrels per day agreed last year) during the first quarter of 2020. Less supply should mean higher prices.

So what is going on? Let's analyse the situation in more detail.

Oil prices just can't catch a break

In early January, the price of WTI crude oil tried to break higher after traders were rocked by missile strikes ordered by US President Donald Trump killing an Iranian general. Problems in the Middle East can often help lift oil prices higher as supply routes can be affected.

However, after the retaliation from Iran, oil prices began to move sharply lower. It seemed the market was tuning into the fact there are still major geopolitical uncertainties which could affect global economic growth. Weak data from the US, China and the UK certainly did not help.

Now, the oil market faces a new threat to global economic growth - the coronavirus. The outbreak in China has already raised concerns regarding a substantial hit to its economy. The global pandemic which is spreading faster than the WHO (World Health Organisation) would like, is already putting a huge dampener on global travel and economic production thereby lowering the demand for oil.

As Commerzbank said in a note: "One should be prepared for negative surprises when it comes to Chinese demand given that the government has now widened the coronavirus quarantine to ten cities in Hubei province with a total population of 30 million people. The impact of this is all the greater because the restrictions are being imposed during the busiest travel season for the Chinese."

How to Trade WTI Crude Oil

The long-term monthly chart of WTI crude oil highlights the historical volatility of the market:

Source: Admiral Markets MetaTrader 5, WTI, Monthly - Data range: from 1 December 2006 to 27 January 2020, accessed on 27 January 2020 at 10:15 am GMT. Please note: Past performance is not a reliable indicator of future results.

With Admiral Markets you can speculate on the price direction of WTI crude oil by using a CFD (Contract for Difference) which allows traders to go long and short on the market.

What some traders may find interesting is the formation of a well know candlestick pattern called a bearish engulfing candle. These type of candle formations are often used in price action trading strategies.

The bearish engulfing candle formation is illustrated below:

An example of the bearish engulfing candlestick pattern.

The bearish engulfing candle pattern, as shown above, is based on two candlesticks. The most important candle is the second one which engulfs the range (high to low) of the previous candle. On the second candle buyers push the market up, breaking the high of the previous candle. However, during the same candle sellers step in and push it all the way down breaking the low of the previous candle and closing lower. This represents a significant shift in momentum to the downside.

If we zoom into the monthly-price chart of WTI crude oil we can notice at least three examples of a bearish engulfing candle formation which led to significant downside after forming. These are highlighted in the yellow boxes below:

Source: Admiral Markets MetaTrader 5, WTI, Monthly - Data range: from 1 December 2006 to 27 January 2020, accessed on 27 January 2020 at 11:15 am GMT. Please note: Past performance is not a reliable indicator of future results.

So how do traders use this type of analysis? Typically, this helps traders to have a focus in which direction to trade. In this instance, the pattern is suggesting the market could fall. Traders may then go to the lower timeframes such as the daily, four-hour, hourly chart and so on to identify potential selling, or shorting opportunities. This is where trading strategies become useful. You can learn six different types of strategies in the 'Trading Strategies' article.

Traders also need to analyse just how far the market can fall before other traders start profit-taking and the move reverses. In the case of WTI crude oil, there is a significant horizontal support line at $50.58 where buyers have historically turned before. This is an area short-sellers may consider taking some profits.

This is shown by the lower black horizontal line in the daily chart of WTI crude oil below:

Source: Admiral Markets MetaTrader 5, WTI, Daily - Data range: from 8 August 2018 to 27 January 2020, accessed on 27 January 2020 at 12:15 am GMT. Please note: Past performance is not a reliable indicator of future results.

So far in January, the price of WTI crude oil has crashed 20% lower. The technical chart pattern seems to suggest there could be some further downside yet to come, how will you be trading it?

One way is to make sure you have access to the best trading products available to you. Did you know Admiral Markets provides a supercharged version of MetaTrader 5 called the MetaTrader Supreme Edition? This provides traders with additional trading features such as the correlation matrix, Admiral Pivot, a mini-terminal for quick and advanced order functionality and much, much more!

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