By Barani Krishnan
Investing.com - Familiarity breeds contempt, or so the saying goes. But with the oil market, familiarity is breeding uncertainty.
Just a week after a robust price rebound, U.S. West Texas Intermediate crude and global oil benchmark Brent are both back at the Covid crossroads, finishing the current week lower as the familiar, old question pops up: Will recovery continue from here or are we headed for another lockdown of sorts?
“WTI crude has not been able to do much after capturing the $40 level and seems destined to continue to consolidate between the $35 and $42 level over the next couple weeks,” said Ed Moya, analyst at New York online trading platform OANDA. “The rapid demand rebound is not happening, but stimulus efforts, pauses in reopening of businesses, improved treatments for the virus are limiting the downward pressure on crude prices.”
Fears about the Covid-19, meanwhile, brought U.S. gold futures precariously close -- less than $4 short actually -- to cracking the $1,800 target that longs in the market have eyed the last nine years.
While upward momentum in the yellow metal cooled on Friday, analysts were banking on the market reprising 2011 highs before the end of next week, and possibly record highs above $1,900 later in July.
Gold could also keep moving higher, hitting the $2,000 level later this year, or next year, strategists said.
"Investors are getting nervous due to the current rise in coronavirus cases and quitting their positions in riskier assets like stocks, while parking their investments in gold and bonds," said Bob Haberkorn, senior market strategist at RJO Futures in Chicago.
The grim reality of the novel coronavirus continued to batter the United States at the weekend, with a record 44,782 new cases reported Saturday, the second day in a row that new cases have risen above 40,000 and the fifth consecutive day for caseload records.
Texas, the state with the largest number of oil refineries, saw higher coronavirus-related hospitalizations for the 16th consecutive day, with 5,523 patients currently being treated. Hospitalizations have risen rapidly since Memorial Day, when there were 1,511 covid-19 patients in the state’s hospitals.
Texas Governor Greg Abbott ordered all bars closed and put restrictions on outdoor gatherings amid the state’s surge in cases. On Thursday, Mr. Abbott paused reopening plans, but said he wouldn’t clamp down where the state had relaxed restrictions.
U.S. oil and gas firms in Texas and the surrounding area don’t expect global oil consumption to return to the levels seen before the coronavirus until late next year or later. A recent survey by the Federal Reserve Bank of Dallas found around 51% of respondents expect such a recovery by the fourth quarter by the late 2021 or later, if not at all.
More than half of executives from 160 different oil and gas firms said they had applied for at least one government assistance program, according to a survey from the Federal Reserve Bank of Dallas.
“Higher rates of working from home and fewer leisure trips this summer are likely to further hamper oil demand in the developed market,” Bethany Beckett, an economist at Oxford Economics, in a note, the Wall Street Journal reported.
Elsewhere, in tourism-heavy places such as Florida, which is home to Disneyland, along with Georgia, South Carolina and Nevada, caseloads all hit new highs too, with Arizona setting a record for current hospitalizations.
The International Monetary Fund, meanwhile, says major oil producers including Saudi Arabia and Russia will enter deep recessions this year as they struggle with the economic fallout from the coronavirus pandemic.
In an update of its World Economic Outlook released in April, the IMF said that for the first time all regions of the world will experience a simultaneous economic contraction (negative growth) in 2020.
The report -- titled A Crisis Like No Other, An Uncertain Recovery -- painted a gloomy picture for the world economy this year, forecasting a contraction of 4.9%, versus the contraction of 3% it had projected in April.
"The Covid-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast," the IMF said.
New York-based Energy Intelligence suggested in an analysis that national oil companies, from Saudi Arabia’s Aramco (SE:2222) to Malaysia’s Petronas, were in a flux on how to react to the crisis.
“NOCs come in all shapes and sizes, but most share core DNA,” the consultancy said. “For their stakeholders, NOCs are viewed as central to both national wealth generation and economic sovereignty.”
The new harsher post-Covid-19 operating environment means structural economic reform were needed for producers and consumers alike. The question is to what extent NOCs should act as the main lever for these changes,” the consultancy said.
Bloomberg also reported that as OPEC and its allies made deeper cuts to crude production, Norway’s giant Johan Sverdrup oil field was exporting more than ever before.
Crude loadings from the field are set at a record 4.4 million barrels, or 465,000 barrels a day, in August, according to a loading program seen by Bloomberg. That’s compared with 429,000 barrels a day expected in July.
Norway’s state-controlled energy company Equinor ASA (NYSE:EQNR) pledged to slash production from the Johan Sverdrup field by 20% in June, as the country moved ahead with historic oil-output cuts in cooperation with the Organization of Petroleum Exporting Countries and its allies. The curbs are aimed at rebalancing the oil market and eliminating a glut.
Energy Markets Review
Crude oil WTI futures settled down 52 cents, or 1.3%, at $38.20 per barrel on Friday.
Brent, the global benchmark for oil, settled down 32 cents, or 0.78%, at $40.73.
For the week, WTI showed a decline of 3.2% while Brent was down 3%.
The U.S. Energy Information Administration, in its weekly update on Wednesday, said crude output was estimated at 11 million barrels per day for the week ended June 19, versus 10.5 million bpd in the previous week.
It was the first rise in U.S. production in 13 weeks. It comes after a 20% drop in output that followed the demand destruction for fuel caused by the coronavirus pandemic, after the record highs of 13.1 million bpd set in mid-March.
The production hike reported by the EIA for the week ended June 19 coincided with the 1.4 million-barrel build in crude stockpiles for the week, versus the 300,000 barrel rise anticipated by forecasters.
On the fuel demand side, the EIA reported a decline of nearly 1.7 million barrels in gasoline stockpiles, or about 400,000 more than expected. But to offset that, it also said distillates inventories, led by diesel, rose nearly 250,000 barrels against a forecast drop of 620,000.
Energy Calendar Ahead
Monday, June 29
Private estimates on Cushing oil inventories from Genscape.
Tuesday, June 30
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, July 1
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, July 2
EIA weekly report on natural gas storage
Friday, July 3
Baker Hughes weekly survey on U.S. oil rigs
Precious Metals Markets Review
Gold prices rose for a third week in a row, intensifying its target for $1,800 pricing, as investors piled into safe havens amid a new global surge in coronavirus cases.
U.S. gold futures for August delivery settled Friday’s trade up $14.2, or 0.8%, at $1,784.80 per ounce on New York’s Comex. On Thursday, the benchmark gold futures contract spiked to $1,796.1, the highest reached on COMEX since November 2011.
For the week, Comex gold was up 1.7% after gains of 0.9% and 3.2% in the previous two weeks.
Spot gold, which tracks real-time trades in bullion, rose by $7.79, or 0.4%, to $1,771.47 on Friday. The bullion indicator hit an intraday high of $1,779.45 in the previous session, marking a peak since October 2012.
For the week, spot gold rose 1.6%.
* Disclaimer: Barani Krishnan does not own or hold a position in the commodities or securities he writes about.