Crude oil remains challenged despite bounce
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.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.