Crude Oil Plunges Below $ 48 – Covid19 Concerns Drive Selling!

During Tuesday’s Asian trading session, the WTI Crude Oil prices failed to put a stop to the early-day bearish bias, remaining depressed around the $ 47.50 level, as the Organization of the Petroleum Exporting Countries and allies, or OPEC+, continues their deadlocked talks on output for February. Apart from this, the number of global COVID-19 cases continues to rise, and as a result, more countries have introduced restrictive measures. This was seen as another factor that kept crude oil prices under pressure. Across the pond, the reason for the losses in the crude oil prices could also be associated with China’s downbeat Caixin Manufacturing PMI data, which was released on Monday, showing that activity had slowed in December.

In contrast to this, the weakness of the broad-based US dollar helped to limit deeper losses in the higher-yielding crude oil prices, as the oil price is inversely related to the greenback. However, the losses in the US dollar were manly due to the expectations that the Federal Reserve would keep rates low for a prolonged period. Meanwhile, the losses in crude were also capped by the reports suggesting that Iran’s Revolutionary Guards Corps have seized a South Korean-flagged tanker in Gulf waters and detained its crew. At the moment, crude oil is trading at $ 47.44, and consolidating in the range between 47.25 and 47.82.

As we have already mentioned, the crude oil prices dropped by more than 1% overnight, after the Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group is known as OPEC+, failed to agree on changes to February’s oil output. As per the latest report, Saudi Arabia did not show any willingness to increase production, as more countries are contemplating the imposition of new lockdowns. Conversely, Russia showed interest in increasing production, citing recovering fuel demand as the reason. So the OPEC+ drama has kept the traders’ sentiment cautious and contributed to the crude oil losses.

The investors are more concerned about the impact of the new B177 strain of COVID-19 on the global economic recovery. As per the latest report, Japan witnessed a record number of COVID-19 cases last week, which prompted Prime Minister Yoshihide Suga to announce that he will consider declaring a fresh state of emergency in the Tokyo area. Across the ocean, British Prime Minister Boris Johnson also issued warnings regarding the possibility of tougher lockdown restrictions in the UK, which instantly overshadowed the optimism surrounding the rollout of  vaccines for the highly contagious coronavirus, and contributed to the losses in the equity market. The bearish appearance of the US stocks futures also tends to highlight the risk-off sentiment, which is undermining the higher-yielding crude oil prices.

Apart from this, another reason for the bearish crude oil prices could also be associated with the previous day’s release of downbeat Chinese Caixin Manufacturing PMI data, which confirmed that activity slowed down in December. The gauge dropped to 53.00 in December, against November’s 54.9 and  the projected 54.9. The government PMI also dropped, falling to 51.9 in December from 52.1 in November. Meanwhile, the renewed geopolitical tensions between the US and Iran, and the intensified tussle between the US and China, have also played a major role in undermining the crude oil prices.

Despite the risk-off market sentiment, the broad-based US dollar failed to gain any positive traction, languishing close to multi-year lows, amid the probability of an additional US financial aid package and speculations that the Fed will keep interest rates lower for an extended period. Apart from this, the optimism over the potential of the coronavirus vaccines is urging investors towards riskier currencies and higher-yielding assets, rather than safe-haven assets, which in turn is leading to further losses in the safe-haven greenback. However, the losses in the US dollar have become a key factor that is keeping a lid on any additional losses in crude, because the oil price is inversely related to the price of the USD. By 8:49 PM ET (1:49 AM GMT), the US Dollar Index, which tracks the greenback against a basket of other currencies, had dropped by 0.04%, to 89.812

In the absence of any key data/events on the day, the market traders will keep their eyes on the release of US crude oil supply data by the American Petroleum Institute, which is due later in the day. Meanwhile, the updates about the US stimulus package will be key to watch. Furthermore, the risk catalysts, like geopolitics and the virus woes, not to forget Brexit, will not lose any importance. Good luck!