Oil has taken the hardest hit from Trump's positive COVID-19 test, but the market was already looking fragile

• Oil fell as much as 5% on Friday after Presidnet Donald Trump said he had tested positive for COVID-19. That decline far outpaced other asset classes.
• Trump's test has no direct impact for the oil market right now, but it has brought into stark focus the risks to both supply and demand, analysts said.
• Crude oil is set for its biggest weekly slide since the end of August and the price is approaching recent three-month lows.

Affter US president Donald Trump tweeted early on Friday morning that he and his wife had tested positive for COVID-19, global financial markets went into a tailspin. Stocks, cryptocurrencies, and industrial commodities slid sharply and gold and safe-haven Treasuries rallied.

But it was oil that took the hardest hit.

The price of WTI crude oil plunged by as much as 5% at one point on Friday, while the S&P 500 slid just 1.7% at intraday lows, while the dollar index rose roughly 0.1%. That put crude on pace for its biggest weekly fall in weeks.

Trump's positive COVID-19 unnerved investors, but has little direct, immediate impact on the broader financial markets, even with the presidential election just one month away now.

Crude is one of the most sensitive commodities to geopolitics and the economy, along with stocks and the dollar, but the reaction in the market on Friday was more in keeping with that to a direct supply or demand shock, than to a development in Washington DC.

Here's why the oil market seemingly took the news of Trump's test so hard:

With Covid-19 rearing its head, demand looks less rosy

Since falling to a historic negative $40 a barrel in April this year — when the coronavirus pandemic brought global transport ground to a halt and the virtually closed down factories — oil has rallied almost 200%. It's been lifted by improving demand and a pledge by the largest exporting nations to keep production as low as they can tolerate.

The economic evidence so far suggests recovery was well underway for several months, and that any unwanted surplus fuel that built up this year would be quickly absorbed with a return to normality.

But in the space of a few weeks, cases of COVID-19 have started to climb, governments have begun reimposing lockdown restrictions and some of the world's largest airlines are either laying off staff, or putting them on furlough.

And Trump's positive test has brought into focus the prospect that the promised resurgence in oil demand may be about to flop.

"We have to think where we've come from in terms of price." SEB head of commodity strategy Bjarne Schieldrop told Business Insider. "When we were trading at $46-47 in August, that was on strong anticipation of more than 3 million barrels per day in drawdowns from September and December."

In mid-September, the International Energy Agency, which advises western governments on energy policy, warned demand growth in 2020 would fall to its lowest in seven years and warned there was a "treacherous path ahead" for economic recovery.

"Everything has gradually got better, but aviation can't and I don't think the market has really factored that in that digital dimension to air travel. Governments say no, insurers say no, companies say no, you can't travel. It's not a question of travelling less, it's about not travelling at all," Schieldrop said.

No more "free lunches" on the supply side

The coronavirus pandemic, which has already killed over a million people worldwide, has changed the way a lot of people live, from how they buy their groceries or their clothes, to how they get around.

In order to respond to the collapse in energy demand earlier this year, the Organization of the Petroleum Exporting Countries along with rival producers such as Russia, Kazakhstan and Oman, agreed to curtail crude production by a record 9.7 million barrels a day to allow demand to normalize and prevent a build-up in surplus oil and refined products.

As the world has emerged from the worst ravages of the pandemic, OPEC, led by Saudi Arabia, and its allies has gradually begun to turn on the taps. With the oil price struggling to get much above $40 this year, most will struggle to balance their budgets.

Saudi Arabia, for example, will need an average crude price of around $76 a barrel this year to balance its budget.

But output is creeping higher than that more quickly. Libya, an OPEC member that has been exempt from the cuts because of years of violent conflict that has frequently interrupted output, has seen output triple in the space of two weeks, according to Reuters.

Iran, which has been banned from exporting oil for the past two years by the Trump administration, has been shipping more crude over the past few weeks, according to various analysts. Russia, meanwhile, said on Friday it had produced a little above its quota, in a statement from the energy ministry.

"The production hikes by Russia, Iran and Libya – the former is a member of OPEC+ while the latter two belong to OPEC but are not bound by the OPEC+ agreement – are likely to generate unrest within the cartel and may encourage "cheating", i.e. production through the back door. Thus the situation on the oil market remains very challenging," Commerzbank analyst Carsten Fritsch said in a note.

Technically, oil doesn't look so great right now

Finally, the 13% slide in the value of a barrel of oil over the last five weeks has left oil looking a little vulnerable on the technical charts.

Brent crude is hovering around the pivotal $40 a barrel threshold, while WTI is near $37.50, another key chart point.

"Having found resistance at $42.60 a barrel, Brent crude turned lower and broke recently below established support to touch the lowest level since June. The market will now be focusing on the June 12 low at $37 a barrel as the next level of support," Ole Hansen, Saxo Bank head of commodity strategy, said in a weekly note.

Furthermore, Brent has been unable to break above the 200-day moving average, a sign some analysts believe tilts the price risk towards the downside.

Credit Suisse analysts said this put the next layer of support at $37.18/35.37. A break of this level could unleash a selloff down to $31.25, they said.