WTI Probes 1-Year Low at $50.00 – Time for a Dead Cat Bounce?
Matt Weller, CFA, CMT February 3, 2020 8:07 PM
Oil traders may look at any near-term rally as a “dead cat bounce” and look to re-enter short positions on any bounce toward the $53.00-54.00 area.
When it comes to traders’ fears about the spread of coronavirus, actions can speak louder than words (and data). For instance, the Chinese government’s “aggressive” decision to essentially quarantine nearly 50M people and build two new hospitals in record time foreshadowed that the number of infections was likely to get worse before it got better, a dynamic that has played out over the last two weeks.
A similar dynamic is taking place in the oil market today. According to Bloomberg, Chinese demand for oil products has fallen 20% amidst the lockdown; the estimated 3M b/d decline in demand would mark the worst demand shock since the Great Financial Crisis. Meanwhile, a separate Reuters report that OPEC+ is considering a 500k b/d production cut as early as the middle of this month to try to address the steep drop in demand confirms the severity of the issue.
When it comes to oil prices, traders have been selling first and asking questions later. The price of West Texas Intermediate crude oil has collapsed by nearly 25% in less than a month, and despite today’s recovery in other risk assets, WTI continues to probe new lows heading into the close. As the chart below shows, WTI is testing the psychologically-significant $50.00 level, its lowest price in over a year:
Source: TradingView, GAIN Capital.
Over the past 12 months, the $50.00-51.00 corridor has provided support for prices, and with the RSI deeply in oversold territory as of writing, an oversold bounce from these levels cannot be ruled out. That said, until authorities can provably contain the spread of coronavirus, oil traders may look at any near-term rally as a “dead cat bounce” and look to re-enter short positions on any bounce toward the $53.00-54.00 area. Meanwhile, if oil is able to close below $50.00, the next logical level of support would be the 78.6% Fibonacci retracement of the H1 2019 rally near 47.50.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.