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Oil Price Fundamental Weekly Forecast – Industry Preparing for Demand Shock Due to Coronavirus

James Hyerczyk

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed higher last week despite elevated concerns about the coronavirus’ impact on global demand growth. The markets hit one-month highs early in the week, but began to weaken on Friday after weak Asian economic data generated more uncertainty about the region’s economic outlook. Additionally, traders continued to grow more impatient with OPEC and its allies’ inability to make a decision about additional production cuts.

Last week, April WTI crude oil settled at $53.38, up $1.06 or +2.03% and April Brent crude oil finished at $58.50, up $1.18 or +2.02%.

Early in the week, three factors contributed to the markets’ strength. They were fresh stimulus from China, a drop in new coronavirus cases at the epicenter of the outbreak and supply concerns in Venezuela and Libya. The selling pressure reemerged on Friday as the coronavirus death toll rose and the virus was reported in several areas outside of China.

China Lowers Benchmark Lending Rate

China’s move to cut its benchmark lending rate on Thursday helped ease worries about slowing demand in the world’s second-biggest oil consumer and largest crude oil importer. However, the move was already priced into the market. Furthermore, the reaction to this news may have been muted because it takes time for the change to circulate through the economy. Secondly, the number of factories open for business is still low so it’s difficult to see demand stabilizing at this time.

Traders Show Little Reaction to Minor Supply Adjustments

On Wednesday the U.S. sanctioned a trading unit of Russian oil giant Rosneft for its ties with Venezuela’s state-run PDVSA, a move which could choke the OPEC member’s crude exports even further. At the same time, conflict in Libya that has led to a blockade of its ports and oilfields shows no signs of a resolution.

Cutting supply is nearly always bullish for crude oil prices. In this case, I think the moves are underpinning prices rather than driving them higher. The main driver of the price action in my opinion remains speculation that OPEC and its allies will cut production further when they meet in March. The reaction in the market could come sooner if Russia says it will go along with the plan.

U.S. Energy Information Administration Weekly Inventories Report

The EIA revealed on Thursday that U.S. crude supplies edged up by 400,000 barrels for the week-ended February 14. Analysts were looking for a rise of 3.3 million barrels.

The EIA data also showed a supply decline of 2 million barrels for gasoline, while distillate stocks fell by 600,000 barrels. Analysts were expecting a 300,000 barrel increase in gasoline supplies, but distillates were forecast to fall by 1.6 million barrels.

Major Asian Economies Showing Weakness

The week started with Japan reporting its economy shrank 1.6% in the fourth quarter of 2019. The decline from the third quarter was the biggest contraction since 2014. The drop was even more severe – a 6.3% plunge – when measured as an annualized rate.

Thailand announced that economic growth slowed last quarter. Meanwhile, Singapore’s Ministry of Trade and Industry downgraded its economic outlook for the year because of fears about the spread of the virus.

Weekly Forecast

Even if the outbreak begins to recede, the damage is done, which means crude oil demand growth will take a near-term hit before bouncing back over the remainder of the year.

Last week, IMF Managing Director Kristalina Georgieva said she hoped the economic impact of the virus would be “a V-shaped curve” with a sharp decline in China and sharp rebound after containment of the virus. “But we are not excluding that it might turn to be different scenario,” she said.

However, this forecast means very little because the International Monetary Fund said it was too early to tell what impact the virus would have on global growth.

Traders are likely to keep pressure on crude oil because of an expected supply surplus in the first quarter and the need for OPEC+ to take further action at their meeting in early March. Furthermore, the rapidly rising U.S. Dollar is likely to lead to a drop in demand for dollar-denominated crude oil.

Last week, oil traders thought additional production cuts from OPEC+ were imminent, but Russian Energy Minister Alexander Novak dampened those thoughts on Thursday when he said that global oil producers understood it would no longer make sense for OPEC and its allies to meet before their gathering in March.

U.S. officials will have a better idea of how the coronavirus outbreak will impact the economy in “three or four weeks,” U.S. Treasury Secretary Steven Mnuchin said Sunday.

Mnuchin’s assessment likely means the market will be subject to more two-sided trading and elevated volatility.

This article was originally posted on FX Empire