This article was written exclusively for Investing.com.
Concern that a new Covid variant will prompt fresh mobility restrictions and hinder the economic recovery, has roiled the global markets today. Every risk asset you can think of has fallen, with crude oil and travel stocks taking the brunt of the sell-off.
Although we know very little about the new Covid variant, and it hasn’t spread very far yet, investors have taken decisive action. Experts’ alarming warnings mean it has the potential to hit the global economy very hard.
Cases of the existing Covid variants have already soared across Europe, prompting a number of countries to introduce restrictions to slow the spread of the virus. But the new variant adds a degree or two of urgency as it has “a large number of mutations,” according to the WHO, implying that it may be resistant to the current Covid vaccines.
Already, the UK has announced a temporary flight ban from a number of southern African countries. If more countries follow suit, we could see demand for air travel fall. This is why airline stocks and crude prices have slumped today.
While we don’t know how infectious the variant may turn out to be, and whether the current vaccines will be effective against it, the slump in crude prices comes just as the US and a few other oil consuming nations are releasing crude from their strategic reserves to add output to the global supply.
Until today, the feeling among market participants was that the OPEC+ group will stick with the policy of raising output by 400,000 barrels per day at its meeting next week. However, the potential for more lockdowns means demand in Q1 could fall sharply, raising the prospect of the OPEC+ potentially holding back supply.
Therefore, the downside could be limited from here ahead of the OPEC+ meeting on Dec. 2 and with oil prices having fallen nearly 15% from their multi-year highs hit in October. But that’s not to say prices won’t weaken a little further over the coming days, especially if worries about the new variant of Covid intensify. So, the upside should be capped until at least the OPEC+ meeting on Dec. 2.
Several support levels have been broken, making crude oil a candidate for bearish speculators to target. The turning point was when prices failed to hold above $80 per barrel, a key psychologically-important level. Since then, we have seen a series of lower lows and lower highs form. The path of least resistance is thus clearly to the downside for the time being. As such, I would favour selling into rallies near resistance than buying the dips at support, over the next few days.
One such resistance area to look out for is around $75.00 to $76.00 area. This was support on at least a few occasions since prices broke above it in early October. Once support, it is likely to be strong resistance going forward since prices have failed to stay above it.
On the downside, the area around $73 is important to keep an eye on for interim support. While today’s selling may be overdone, it is possible crude oil prices may drop further lower towards an even stronger potential support zone, which comes in between the $70.00 hurdle and $71.00.
This area was the base of the previous break out that sent prices to fresh multi-year highs. It is a demand zone, in other words. In addition, a bullish trend line, derived from connecting the lows in November 2020 and August 2021, converges with the 200-day moving average. The 200 MA is still rising and as such it indicates objectively that the longer-term trend is bullish.
Thus, when it comes to trading crude oil and if you are going short, it is prudent to take at least some profit every time prices slip sharply, as you are betting against the longer term trend. It is quite possible that soon the selling could end, as the market is still very tight and the widespread lockdown traders fear may not materialise.