By Barani Krishnan
Investing.com - A second straight week of gains for oil, yet the rebound barely looks like it has legs. If there’s one thing to be expected of the coronavirus, it is to expect the unexpected - and that applies to traders of all sizes and stripes.
To illustrate how differently governments have reacted to the virus, the Trump administration has demanded cancelation of U.S. flights to China, forced quarantines and even denied the return of American medical workers who went on mercy flight to Chinese cities. The Abe administration in Japan, meanwhile, flew in planes with aid packages to China.
Markets have had their own variations of impact from the crisis. Wall Street, particularly, looks for any alleviation in infections or financial stimulus by China as an excuse to chase record highs in stocks. Oil, meanwhile, sunk into a bear market within the first weeks of the crisis on fears of a sharp slowdown in demand in China, the world’s largest consumer of energy and just about any commodity.
Since then, the demand story in oil has barely improved, which makes the price rebound of the past two weeks suspect - and the inability to squeeze another gain on Friday totally understandable.
The only real support for oil since the coronavirus broke is the threat of supply outages - either from strife in LIbya or the Trump administration’s newest sanctions aimed at the Rosneft-Venezuela pact or OPEC’s desperate attempts to manufacture a shortage with Russian collusion.
And what are the real demand stories likely in oil?
According to Russel Hardy, head of top oil trading house Vitol, the pandemic in China combined with a relatively-kind winter could result in a demand deficit of 200 million barrels by the end of the first quarter - or a net loss of 2.2 million barrels per day. Peak demand lost during the worst of the first quarter could be 4 million bpd, the Vitol chief added.
That seems to match what the International Energy Agency says. The IEA forecasts that demand for oil will be 435,000 barrels less per day versus the first quarter of 2019.
The Paris-based agency also cuts its growth projection for 2020 to 825,000 barrels per day, a reduction of nearly a third from its previous target, and the lowest growth forecast since 2011. It is the IEA’s most bearish forecast for oil since crude prices went back up to $100 a barrel after the financial crisis, before falling back to nearly $25 in recent years.
And what does OPEC offer?
A 600,000 bpd cut if Russia agrees to cooperate - if not, half of that, reportedly via a three-way pact among Riyadh, the United Arab Emirates and Kuwait, speculation about which Saudi Energy Minister Abdulaziz bin Salman said at the weekend was “ridiculous”.
Whatever the case, oil’s likely to see more volatility in the coming days and weeks as Russia continues to parry off OPEC demands to expedite cuts, while the Saudis talk up the market. Amid these, the Libyan oil blockade will likely continue, while the market wonders whether Venezuela will get some of its oil out by by teaming with another Russian company to skirt the Trump administration’s newest sanctions on Caracas.
In gold’s case, there seems to be little to stop the “Bullion Express” as the safe-haven crowd takes quite a different view of the coronavirus crisis than the risk takers in stocks and oil.
After gold futures blew past the $1,650 resistance on Friday following a series of seven-year highs during the week, analysts at key Wall Street banks and elsewhere are now calling for a $1,700 peak - also last seen in 2013.
Energy Review
Oil prices fell Friday despite posting a weekly gain as the coronavirus contagion ticked higher and the OPEC-Russia production pact that had supported the market the past four years appeared to be coming to an end.
West Texas Intermediate, the U.S. crude benchmark, settled down 50 cents, or 1%, at $53.38 per barrel. It hit a one-month high of $54.63 in the previous session, and ended the week up 2.6%.
Brent, the global benchmark for crude, settled down 81 cents, or 1.4%, at $58.50 per barrel. Brent hit a three-week high of $59.99 on Thursday and finished the week up 2.1%.
Beijing, which already had a death toll of more than 2,000 and over 45,000 infections from the coronavirus, reported 118 new deaths and 1,109 new cases on Friday. South Korea reported 100 new infections, doubling its cases. In Japan, more than 80 people tested positive for the virus.
Factory activity in Japan also registered its steepest contraction in seven years in February, hurt by fallout from the outbreak.
Until Friday, oil prices had risen without a break for more than a week, but the rally was threatened now by the prospect of a fallout between the Saudi-led OPEC and Moscow, which represents the interests of Russia's state and independent oil producers.
The two sides have collaborated since December 2016 in an effort to balance global oil supply amid a surge of crude from U.S. shale producers.
But an emergency meeting earlier in February, Russia rejected a Saudi push to deepen the alliance’s existing oil production curbs by 600,000 barrels a day
The Wall Street Journal reported on Friday that the Saudi kingdom, Kuwait and the United Arab Emirates - which collectively represent over half of OPEC’s production capacity - have decided to go it alone without Russia on the cuts. The troop are holding talks this week to discuss a possible joint output cut of as much as 300,000 barrels a day.
Energy Calendar Ahead
Monday, Feb 24
Private Genscape data on Cushing oil inventory estimates
Tuesday, Feb 25
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Feb 26
EIA weekly report on oil stockpiles
Thursday, Feb 27
Friday, Feb 28
Baker Hughes weekly rig count.
Precious Metals Review
Gold raced to 7-year highs on Friday, while accruing its biggest weekly gain in four years, as analysts targeted $1,700 as their next resistance for the yellow metal amid the rush into safe-havens by investors fearing the coronavirus contagion.
Gold futures for April delivery on New York’s COMEX settled Friday’s trade settled up $28.30, or 1.7%, at $1,648.80 per ounce. The session high of $1,651.85 was the highest since February 2013. For the week, COMEX gold rose 4.2%, its biggest weekly advance since April 2016.
Spot gold, which tracks live trades in bullion was up $24.56, or 1.5%, at $1,643.97 by 2:44 PM ET (19:44 GMT). Bullion earlier rose to a seven-year high of $1,649.04.
So far into February, bullion and gold futures are up about 4%, similar to how they finished January, and are on track to a third straight positive month that places them up 8% on the year.
Citigroup said that it expects gold to hit $1,700 in the next six to 12 months and $2,000 in the next 12 to 24 months.
Gold will “outperform on a risk market unwind should coronavirus risks impact supply chains and thus U.S. earnings momentum,” Citigroup’s precious metals analysts led by Ed Morse said.
But more than as a virus hedge, gold was also indicating that the Federal Reserve might cut U.S. rates again, Morse’s team said.
TD Securities had a similar view.
“A portion of the recent surge can surely be attributed to a safe-haven bid, but risk markets have not experienced the pain that typically coincides with a haven bid, suggesting there is more to this rally in safe assets than just the uncertainty driven bid,” TD Securities daily note on precious metals said.
“Gold and rates appear to be telling the Fed they need to cut once again if their inflation goal is to be reached.”