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Crude Oil Selloff Deepens; Can NFP Data Dwarf Coronavirus Fears?

Crude Oil Selloff Deepens; Can NFP Data Dwarf Coronavirus Fears?

2020-02-01 09:00:00
Rich Dvorak, Analyst
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OIL FORECAST: CRUDE CRUMBLES AS CORONAVIRUS FEARS WEIGH ON SENTIMENT, BUT CAN US JOBS DATA STOP THE BLEEDING?

  • The novel coronavirus outbreak plaguing China has paralyzed risk appetite and pressured crude oil prices lower as investors reevaluate expectations for a rebound in global GDP growth
  • Crude oil now trades in bear market territory owing to the 20% slide from its recent peak owing to the resurgence of volatility
  • A freshly inverted US Treasury yield curve reflects the broader breakdown in sentiment over the last month, but another solid NFP report could restore confidence and bolster oil prices

Crude oil plunged a confounding 21.3% over the last 17 trading days and officially places the commodity back in bear market territory. The major selloff in crude oil and movement into safe-haven assets is owed largely to resurfacing global growth fears in light of the international public health crisis that surrounds the novel coronavirus outbreak.

CRUDE OIL PRICE CHART & INVERTED OIL VOLATILITY INDEX

Crude Oil Selloff Deepens; Can NFP Data Dwarf Coronavirus Fears?

Chart created by @RichDvorakFX with TradingView

Coronavirus concerns have brought travel and trade across China to a pause, which has traders trying to determine the economic cost of the impending healthcare pandemic. In turn, crude oil price action has crumbled alongside the revival of volatility and risk-aversion across the broader market.

Check out these crude oil factsfor more information on what affects the price of crude oil.

Oil volatility – measured using Cboe’s OVX Index – has skyrocketed to its highest reading since early October while crude oil prices fluctuate around 16-week lows. Volatility may rise further if appetite for risk continues to deteriorate and could keep weighing negatively on the price of oil.

CRUDE OIL PRICE CHART & US TREASURY YIELD CURVE

Crude Oil Selloff Deepens; Can NFP Data Dwarf Coronavirus Fears?

Chart created by @RichDvorakFX with TradingView

Diminishing investor sentiment is also reflected by the US Treasury yield curve, which just inverted again last week for the first time since last October along the 10-year and three-month maturities.

Seeing that an inverted yield curve is believed to foreshadow a forthcoming recession by many market participants, its return to negative territory is unsurprisingly closely correlated to the slide in crude oil prices.

Oil - US Crude MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -6% -1% -3%
Weekly 3% 2% 3%
What does it mean for price action?
Get My Guide

On that note, a lack of re-steepening in the US Treasury yield curve may suggest trader sentiment remains pessimistic and may potentially serve as a bellwether that further downside might be ahead for the commodity.

Conversely, evidence that the US jobs market remains on solid footing would likely bolster investor confidence and could send long-term interest rates and crude oil price action rebounding in response to Friday’s upcoming nonfarm payrolls (NFP) report.

US NFP DATA: CHART OF NET CHANGE IN NONFARM PAYROLLS

Crude Oil Selloff Deepens; Can NFP Data Dwarf Coronavirus Fears?

America’s robust labor market is widely known as the cornerstone of the US economy due to its overarching dependence on consumer spending. While job growth has trended lower since 2018, a 3-month moving average of the net change in nonfarm payrolls reveals the slowdown in job creation is perhaps nearing an end.

That said, the latest NFP report is due for release next Friday, February 7 at 13:30 GMT and could provide commodity traders with a fundamental catalyst that brightens crude oil price outlook as it has in the past if the data surprises to the upside.

Nevertheless, it seems as though coronavirus fears are dominating market dynamics at the moment and may continue to strong-arm the direction of crude oil prices. The rebound in oil after the World Health Organization (WHO) shied away from advising a travel ban was short-lived as markets appear to remain in risk-aversion mode.

Read More: Impact of Virus Outbreaks – S&P 500, Gold, Oil and Currency Analysis

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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