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

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

2020-02-07 12:25:00
Rich Dvorak, Junior Analyst
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OIL FORECAST: CRUDE CRUMBLES AS CORONAVIRUS FEARS WEIGH ON SENTIMENT, BUT CAN US JOBS DATA STEM 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 whopping 20% since the start of the year and officially places the commodity back in bear market territory. The major selloff in crude oil and movement into safe-haven assets over the last several trading days 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 & OIL VOLATILITY INDEX (OVX)

Crude Oil Price Chart

Chart created by @RichDvorakFX with TradingView

Coronavirus concerns have brought trade, travel and business activity across China to a screeching halt, which has traders trying to determine the economic cost of the impending healthcare pandemic. In turn, crude oil price action has crumbled alongside demand prospects amid 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 fails to bounce back and could keep weighing negatively on the price of oil.

CRUDE OIL PRICE CHART & US TREASURY YIELD CURVE (10Y-03M)

Crude Oil Price Chart

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
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Change in Longs Shorts OI
Daily 3% -5% 1%
Weekly -19% -3% -16%
What does it mean for price action?
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On that note, a lack of re-steepening in the US Treasury yield curve may suggest trader sentiment remains shaky and may potentially serve as a bellwether to sustained downward pressure exerted on oil.

Though evidence that the US jobs market remains on solid footing has serious potential to bolster investor confidence and could send long-term interest rates – as well as crude oil price action – rebounding in response to the upcoming nonfarm payrolls (NFP) report due today, February 7 at 13:30 GMT.

NFP CHART – FIRM NONFARM PAYROLLS DATA MAY BRIGHTEN CRUDE OIL PRICE OUTLOOK

NFP Chart Nonfarm Payrolls Historical Data Crude Oil Forecast

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 upcoming NFP report could provide commodity traders with a bullish fundamental catalyst that brightens crude oil price outlook as it has in the past if the data underscores a robust US jobs market.

Nevertheless, it seems as though coronavirus fears continue to linger and may dominate market dynamics once more. This could continue to strong-arm the direction of crude oil price action lower in turn.

Also of note is how the rebound in oil was short-lived after the World Health Organization (WHO) shied away from advising a travel ban and suggests that traders remain skeptical over how well the coronavirus and its adverse impact on global GDP can be contained.

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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