Commodities
Oil price slump continues as second wave of COVID-19 may crush the oil market
Oil prices retreated further on Monday, with prices down more than 10% in less than a week.
The slump in oil prices continued as fears for a second wave of the coronavirus disease could threaten demand recovery, outweigh the further output cuts by OPEC+ and top oil-producing countries, and more Federal Reserve support for the US economy. This is posing a renewed threat to the global economy.
A new outbreak of infections in Beijing over the weekend prompted a response from the Chinese government with another round of closure of schools, sports venues, malls, and supermarkets.
Across some U.S states including Arizona and Florida., infections are rising, even as Americans are reluctant to continue with mask-wearing and social distancing guidelines. However, unlike in March and April where the epicentre of the pandemic was New York, the new explosions of cases are more concentrated in the south. On Saturday, the U.S. reported almost 26,000 new cases, the highest in almost a month. This is adding to the nervousness that the worst is yet to come.
Oil prices retreated further on Monday, with prices down more than 10% in less than a week.
READ MORE: Post COVID: FG releases new strategic policy for survival of oil sector
The Brent crude now sells at $39.55 per barrel and the American WTI is selling at $36.90 per barrel.
According to the head of Oil Markets at Rystad Energy, Bjornar Tonhaugen, “Concerns that we may be seeing the beginning of a second wave of the pandemic are dominating trading floors this morning across the globe, from Beijing to Florida. Markets move in waves of fear and greed, and after greed has enjoyed a long joy ride, fear has started sprouting again.”
These concerns are partly eased by evidence that OPEC+ members are complying with the extended output cuts with Saudi Arabia cutting supply terms to Asia and Iraq promising deeper cuts.
The oil market had a rebound from its record crash below zero in April as the OPEC+ and other top oil producers output cuts took effect. However, the rally appears to have ended last week with the second wave of infections and so the market may need to see the demand recovery push significantly higher.
The IMF is expected to cut its global economic forecast when it releases new figures on June 24. The Fund said in April that global GDP may contract by 3% this year.
READ MORE: Brent crude price fails to remain over $40, concerns over pledge cut strengthens
Meanwhile, the accumulation of oil in storage from the last few months is disturbing. China alone is set to add 440 million barrels to storage in the first six months of the year, according to IHS Markit, the largest increase by any country ever recorded. That buildup in China actually provided a boost to oil prices, offering a source of demand at the peak of the oil crisis. But it’s not clear that the rate of storage injection can continue.
This is compounded by the fact that the prices in the oil market may have rallied too far, to begin with, even before recent data shows an uptick in COVID-19 infections. The Commerzbank pointed out that oil markets had focused on only positive news such as U.S. shale production declines and OPEC+ output cuts while ignoring red flags. The coronavirus never went away and is now spreading to new areas as a country like Brazil recently moved into second place in terms of the number of total deaths from the virus.
According to Commerzbank, the outlook for the oil market is likely to become gloomier again due to the weaker economic data and concerns about a second wave of the COVID-19 pandemic.
Gold was up in Asia on Tuesday morning, as investors increasingly turned to the safe-haven asset given the continuous increase of the number of COVID-19 cases globally without signs of abating soon. As of July 7, data from Johns Hopkins University revealed that there were over 11.5 million cases globally, with the United States accounting for about 3 million of them.
Gold futures were up by 0.06% at $1,794.65 by 10:12 PM ET (3:12 AM GMT), moving closer to the 1,800 mark. Stocks, which typically move inversely to gold, were also up on Tuesday.
In the midst of this, the U.S. reported an Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers’ Index (PMI) of 57.1 for June on Monday. While the figure exceeded analyst forecasts noting that the U.S. services sector is back on a growth trajectory, investors are still cautious about the recovery of the global economy as COVID-19 numbers keep increasing with no cure in sight.
READ MORE: U.S. dollar share of global currency reserves rose to 61.9% in Q1 2020 – IMF
These events will give gold a boost in the short term. The impact of government stimulus measures globally will also impact the commodity.
Stephen Innes, Chief Global Market Strategist at AxiCorp in a note to Nairammetrics, explained in detail why Gold is edging up.
“Gold edges higher as COVID-19 cases increase concerns, offsetting positive data. While the upside is intact, $1,800/oz is stiff resistance. Gold managed to trade up despite a rise in “risk-on” investor appetite and COVID-19 concerns, which do not appear to be going away, are providing underlying support.”
READ MORE: Gold Breaks $1,800 ceiling, reaches record high since 9/11
Commenting on the impact of the U.S. on the price of the commodity, he added that “U.S. fatalities are now above 130,000; as US cases approach 3 million, about a quarter of the entire known global caseload, it raises the level of political discord in the US. Given that the genesis of the “risk-on” shift was only a China Times article encouraging China retail investors to buy stocks, gold investors quickly looked through the market pump.”
“However, one reason the markets remain positive over the longer-term is that gold is tied to government spending and accommodative monetary policies outside the US,” he added.
Commodities
Rising COVID-19 cases in world’s biggest economy falter crude oil prices
OPEC+ is lowering output by 9.7 million barrels per day (bpd) for a third month in July.
Crude oil prices decelerated on Tuesday, pulling back earlier gains recorded at the previous trading session on growing concerns that surging COVID-19 cases in the world’s biggest oil user, the United States, would limit the upside in energy demand.
U.S. West Texas Intermediate (WTI) lost about 0.66%, to trade at $40.46 a barrel at 6.11am local time after surging as high as $40.36 in its intra-day trading session. Brent crude also lost about 0.63%, to trade at $42.83, after hitting an intraday high of $43.19.
“The potential for demand destruction as lockdown re-instatement looks more likely are combining with concerns about OPEC+ discipline to weigh on oil prices,” CMC Market’s Chief Market Strategist Michael McCarthy said in a note to Reuters.
READ MORE: U.S. dollar share of global currency reserves rose to 61.9% in Q1 2020 – IMF
The Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia, collectively known as OPEC+, are lowering output by 9.7 million barrels per day (bpd) for a third month in July.
Stephen Innes, Chief Global Market Strategist at AxiCorp, in an email to Nairametrics, explained the macros limiting the prospect of oil demand. He said:
“The faltering re-opening of the US States is also partially offset by the muscular approach by Saudi Arabia. They are seeking to enforce compliance with OPEC+ quotas – both are currently important in maintaining market balance and ultimately drawing down global inventories.
READ MORE: Gold nears 8-year high, more economic stimulus coming
“It seems traders are getting more accustomed to minor retracements and rallies than expecting a significant price shift this week as a range trade mentality continues to resonate where Brent $40 per barrel does give the appearance of something of a floor.
“With the market torn between robust cyclical data and rising virus case counts in the Sun Belt, putting in significant headroom above $WTI 40 was also challenged by a possible resumption of US shale production as price move higher. While no less concerning is OPEC+ could roll back cuts in August.”
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In addition, data from the American Petroleum Institute industry group scheduled to come out later today and the U.S. Energy Information Administration data planned to be out tomorrow, are expected to show a 100,000 barrel rise in crude oil stockpiles, six experts polled by Reuters estimated.
Commodities
Gold rises near long-time high of $1,800 as U.S. dollar weakens
The price of gold had experienced a level of pressure, temporarily losing its gains.
Gold futures rose even higher on Monday, led partly by a weakening U.S. dollar amidst rallies of global stocks. As measured by the ICE U.S. dollar index DXY, -0.37%, the U.S. dollar was off 0.4%. The implication of a weaker U.S. dollar is that assets that are priced in the currency will become more attractive to buyers that employ other monetary units.
Global stocks had rallied as a result of a surge in Chinese markets as Beijing’s state-run media put out a front-page editorial that encouraged investors to buy stocks towards supporting domestic markets. Yet, the increase in COVID-19 cases in the U.S has left investors unsure.
READ MORE: Tariff Hike postponed till first quarter of 2021
Adrian Ash, director of research at BullionVault explained that, “Bullion prices don’t typically jump because of social unrest or geopolitical strife. But if those stresses add to a financial crisis or economic slump, gold prices can spiral higher.”
For these reasons, gold futures in August rose $2.90, or 0.2%, at $1,792.90 an ounce, following the end of the most-active contract on Thursday according to FactSet data.
READ MORE: Gold futures reach two-months high over rising COVID-19 cases
The price of gold had experienced a level of pressure, temporarily losing its gains which had risen as high as $1,799 a little after the economic data released Monday showed that the Institute for Supply Management’s index of nonmanufacturing companies increased to 57.1% in the month of June from the 45.4% attained in May. This was the single largest increase since the commencement of the survey as far back as 1997.
Ash noted that “It’s hard to see what stops gold reaching new highs from here.”
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