Head of Commodity Strategy
Summary: Crude oil has climbed from a one-year low following news from China that they may have found an effective drug to treat people with the corona virus. However the biggest demand shock since the global financial crisis may still require further production cuts in order to stabilize the market. Next up the weekly petroleum status report from the EIA.
Commodities depending on growth and demand have all receive bid today after Chinese State TV said that a research team at Zhejiang University has found an effective drug to treat people with the new corona virus. Copper which had already managed to find support at the key $2.50/lb level extended its gain to $2.60/lb while WTI crude oil clawed its way back above the psychological important $50/b level.
Both of these commodities have been caught in the crosshairs of a dramatic slowdown in demand from China. Some put the disruption in copper demand at 50% which is serious when considering China consumes around half of the global supply. Estimates for how much crude oil demand has slumped varies with Bloomberg putting it at a very pessimistic 20% of global demand or 3 million barrels/day.
The combination of disrupted supply channels, a prolonged holiday period in China and thousands of flights cancelled have all led to the current situation where the market is dealing with a major demand shock from the world’s second biggest economy. While producers can control supply a slump in demand is much harder to control as producers have to cut production while receiving less for what they sell.
The below table shows the damage done to the energy sector since the corona virus became the main focus on January 20. The slump in WTI and Brent has driving a further sell-off in already out-of-favor exchange-traded funds that tracks different sector stocks. The combination of speculative longs exiting the front end of the curve and the rising availability of crude and product stocks have both helped drive the front of the futures curve back into contango.
Later today at 1530 GMT the Weekly Petroleum Status Report from the U.S. Energy Information Administration is likely to present another challenge to crude oil’s current attempt to recover. Both crude oil and gasoline stocks are expected to rise with the latter potentially reaching another multi-decade high above 260 million barrels. Under pressure refinery margins due to the drop in demand from China has the potential of kicking off a major refinery maintenance season during which crude oil stocks may rise faster than the seasonal norm.
WTI crude oil trades back above the psychological $50/b level and after loosing a quarter of its value since early January a correction at this stage could take it up by 5% to 10% without changing the overall challenging outlook. For that to change we need to see another firm commitment of support from producers to curb production even more.
The focus is once again on the OPEC+ group of producers to make even deeper cuts. At 28.4 million barrels/day (Source: Bloomberg) OPEC is already producing the lowest number of barrels since the 2009 global financial crisis. While Venezuela, Iran and now also Libya have accounted for the bulk through involuntary reductions, it will still be a major decision to yield an even greater market share through an additional cut to non-OPEC producers such as the U.S., Brazil and Norway.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
