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Brent oil forecast for March: Prices may bounce to $50 before facing additional resistance

By David Becker

What brent oil analysis suggests this month

Oil prices have taken it on the chin, tumbling with nearly all riskier assets, in the wake of the spread of the coronavirus. The question for investors is whether the forecasted information about future economic growth represents the future outcome. Fear is obviously baked into crude oil prices, as demand is likely to continue to decline.

The first round of ISM survey data from China was dreadful and while the US PMI numbers missed expectations, future the slowing of growth is more likely to occur in March. For oil, the issue is a demand issue and not a supply issue. While OPEC is likely to act quickly to mitigate the volume of crude oil on the market, they will not likely get an uptick in demand until the Chinese economy looks like it will be on the mend.

Brent oil news: Chinese data is weak

Chinese economic surveys were much worse than anyone could have expected. China's February PMI composite tumbled to a fresh record low of 28.9, almost 10-index points below the low from the Great Financial Crisis. The index dropped sharply to a record-low 29.6 versus 54.1 in January. The sub comments were as bad as the headline figures. New Orders, exports and production fell below 30. The Caixin manufacturing PMI fell to 40.3 from 51.1.

Brent oil technical analysis

The weekly technicals show that crude oil prices are oversold on a short-term basis. Support is seen near the December 2019 lows at 42.10. Resistance is seen near the 10-week moving average at 53.39.

The 10-week moving average crossed below the 200-week moving average which shows at a short-term downtrend is now in place. Prices will likely consolidate but the whipsaw between the 10-day moving average and the December 2019 lows could be very choppy.

Brent oil price chart

The fast stochastic generated a weekly crossover buy signal in oversold territory. This means that the crossover buy signal occurred when the fast stochastic was printing below the oversold trigger level of 20. The current weekly reading of 16, reflects an oversold situation where positive momentum is accelerating.

The relative strength index (RSI) which is a momentum oscillator is moving higher in a downward trend, which could signal the beginning of a correction. The MACD (moving average convergence divergence) index is printing in the read with a downward sloping trajectory which points to lower medium-term momentum.

Brent oil forecast: bottom line

Volatility will remain in place as new information about the coronavirus is revealed. Until there is a method to mitigate the spread, new data will generate volatility. The harsh decline in economic growth in China will likely bounce back, but whether there is a V-shaped recovery or U-shaped recovery is still in question. A V-shaped bound could see crude oil prices heading back toward the 200-day moving average at 55.70. A U-shaped recovery could see prices remain rangebound capped by the 10-day moving average.

If the US looks to be slowing down more than currently expected, which is for a 1 per cent Q1 GDP print, prices could break below the 2018 lows at test the 2016 lows at 39.19. The most likely outcome in March is for prices to bounce to $50 before facing additional resistance.

FURTHER READING: Coronavirus prompts OPEC to cut forecast for 2020 oil demand growth

FURTHER READING: Should investors be thinking about climate change?

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