WTI drops sharply towards bottom of low-$57.00s to $62.00ish range

Crude oil markets, though having recovered nearly 2.0% from earlier session lows, continue to trade with steep losses on the day of more than 4.0%. The American benchmark for sweet light crude oil, West Texas Intermediary or WTI, which started off the day above the $61.00 level, hits lows in the $57.60s midway through US trading hours, but now trades closer to $59.00.

The steep sell-off has seen WTI drop from close to the top to close to the bottom of its recent low-$57.00 to $62.00ish range that has been in play for more than the last two weeks. A break to the downside of the support in the low-$57.00s could open the door to more protracted selling towards the late-January $52.00-$54.00 range.

Driving the day

Market commentators are attributing a combination of demand woes (India and other emerging markets struggling with record Covid-19 infections and Europe still in lockdown), OPEC+ concerns (the cartel agreed to gradually ease output cuts over the May to July period) and Iran supply concerns (Iran and the US said last Friday that they would hold indirect talks in Vienna from Tuesday as part of broader negotiations to revive the JCPOA nuclear deal).

OPEC+’s decision not to roll over output cuts despite a worsening global third wave of Covid-19 cases is being hailed by some analysts as a mistake; “the timing was not good” commented director of energy futures at Mizuho Securities Bob Yawger, before continuing that “it seemed like OPEC+ was going to roll the deal, but they didn't and now it looks like they're going to have to pay at least in the short term”.

Regarding US/Iran talks, Phil Flynn, senior analyst at Price Futures Group, commented that “there is an assumption that we're going to see this flood of Iranian oil in the market… I think this is overstated a little bit”. Indeed, other market commentators pointed out that the fact that the US sent Special Representative for Iran Robert Malley rather than, say, Secretary of State Anthony Blinken (Malley being in a much lower-level position), implies they do not expect much out of the talks. All indications are that a return to the JCPOA nuclear deal and the removal of Iranian oil export sanctions remain some way off.

Looking ahead, geopolitics and the global Covid-19 pandemic seem likely to be the most important drivers of crude oil this week. US economic data has been good as of late and despite boosting stocks, has been unable to boost crude, meaning that upbeat Fed commentary expect this week on the state of the US economy/recovery is also unlikely to help crude oil markets very much.