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.
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.
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.
Oil prices heading for 5th week of gains, near $50 per barrel
Brent crude futures gained over 1%, as it was within striking distance of hitting the $50/barrel price mark after gaining around 1% on Thursday.
Crude oil prices are rallying higher at the last trading session of the week, headed for the fifth week of gains.
OPEC+ members agreed to continue limiting crude oil production to cope with the COVID-19-hit demand, but the compromise agreed on wasn’t what oil traders had really hoped for.
- At the time of writing this article, Brent crude futures gained over 1%, as it was within striking distance of hitting the $50/barrel price mark after gaining around 1% on Thursday.
- West Texas Intermediate futures were also surging by over 1% trading around $46/barrel.
- OPEC+, the popular alliance that includes OPEC members, Russia, and other leading oil producers, agreed yesterday to ease deep oil output cuts from January by producing half a million barrels per day, but still failed to reach a compromise on a broader policy for the rest of 2021.
- Oil traders had earlier anticipated that the popularly known oil cartel group would roll over oil cuts of 7.7 million barrels per day or about 8% of global oil production, at least until the end of Q1 2021.
What they are saying
Stephen Innes, Chief Global Market Strategist at Axi, in a note to Nairametrics, gave vital insights on the outcome of the all-important meeting, and the high expectations of significant price volatility at the crude oil market:
“All eyes were on the OPEC+ meeting overnight, where oil ministers ended up meeting at the halfway house and sharing a glass half full in a typical OPEC + fudgy. They came up with the ultimate compromise as the producer’s group agreed to taper production increases.
“They will start with 500k barrels from January and hold monthly meetings to review prices and decide on output policies. These meetings will bring some volatility to the market and, importantly, stand to make hedging harder for US producers.
“One interesting but not so cohesive front was Saudi Arabia and Russia usually chair the meeting; only Russia did the honours this time. Some see this as a clear sign of the conflicts within the organization.”
What to expect
Looking at the recent price action, Nairametrics is of the opinion that the futuristic price movements of oil prices would largely depend on the degree to which OPEC+ cohesion remains intact.
Oil prices slump, OPEC+ meets today
Brent crude futures prices were down by 0.3%, trading at $48.10/barrel after initially gaining 1.8%.
Crude oil prices were trading lower at the fourth trading session of the week, as major oil producers including Saudi Arabia and Russia are set to meet on oil production cuts extension set in place in the first wave of the COVID-19 onslaughts.
- At the timing of writing this report, Brent crude futures prices were down by 0.3%, trading at $48.10/barrel after gaining 1.8% yesterday.
- U.S. based oil contract, West Texas Intermediate futures, traded at $45.11/barrel, having ended 1.6% higher at Wednesday trading session.
- OPEC+ are resuming talks in discussing policies for next year after earlier talks produced no agreement on how to tackle soft energy demand amid a new COVID-19 wave.
- Oil traders anticipate that the popularly known oil cartel group will roll over oil cuts of 7.7 million barrels per day or about 8% of global oil production, at least until the end of Q1 2021.
- But after hopes coming from three promising COVID-19 vaccines set for the market triggered a rally in oil prices at the end of last month, some major oil stakeholders recently questioned if such prevailing cuts are still needed
What they are saying
Stephen Innes, Chief Global Market Strategist at Axi, in a note to Nairametrics, gave vital insights on leading fundamentals weighing on oil prices including the expected outcome from the all-important meeting scheduled to hold today,
“I expect oil to be whippy but confined to current ranges, until OPEC+ signals the all-clear for traders to shift oil prices back to recent highs.
“Reports were hitting the streets of unnamed OPEC+ delegates saying that progress is being made on talks about production cuts. That, combined with the surprise US inventory draw today, has triggered a move up in oil.
“Discussions will continue in earnest and I think given what is at stake, the base case should be that OPEC+ agrees to an extension of cuts. There are clear tensions within OPEC that may undermine market confidence in the OPEC+ deal from now on.
“It will be more important than ever for OPEC+ to present a unified front, while waiting for demand to recover when the vaccine becomes widely distributed.”
What to expect
Any sign that OPEC+ is struggling to reach an agreement could weigh down on oil prices, at least in the near term.
Gold prices drop amid COVID-19 vaccine optimism
Gold futures prices dropped 0.32% at $1,813/ounce, though it’s now trading above the $1,800 mark.
Gold prices drifted lower in Wednesday’s trading session.
The plunge in the precious metal price is coming on growing optimism over U.S. talks for the latest stimulus deal and a COVID-19 vaccine hitting the market very soon saw a retreat from the safe-haven yellow metal.
- At the time of writing this report, Gold futures prices dropped 0.32% at $1,813/ounce, though it’s now trading above the $1,800 mark after it recorded impressive gains on Tuesday as the U.S dollar retreated, yet gold bulls still face uphill challenges from the COVID-19 vaccine optimism prevailing among global investors.
Global investors are primarily reducing their bullish bias, taking into consideration the most recent testimony from U.S Treasury Secretary, Steve Mnuchin, and US Federal Reserve Chairman, Jerome Powell, on Monday to the Senate Banking Committee.
Though both hinted that the world’s largest economy was on the path to recovery, they emphasized the need for a lifeline.
What you should know
In an explanatory note to Nairametrics, Stephen Innes, Chief Global Market Strategist at Axi, spoke on why the yellow metal could face more selling pressure in the coming weeks, taking into consideration, market sentiments that the future looks bright:
“Gold had been trading well below USD1,800/oz and came close to testing the psychological make or break for ETF concerns USD1,750/oz level. Flashing green lights at the end of the tunnel suggest investors should look through the immediate concerns and focus on the future, which seems incredibly bright and bullish.
“So, with month-end selling pressure mostly out of the way, it could allow investors to focus on those flashing green sectoral lights at the end of the Covid-19 tunnel.”
What to expect
Although, a weaker U.S dollar effectively threw a lifeline around gold prices yesterday, helping it rally back from two weeks of declines. That said, Gold prices might resume its bearish play amid high hopes on COVID-19 vaccines.