By Barani Krishnan
Investing.com - “No way, Jose.” That was effectively Saudi Arabia’s response to Mike Pompeo as the U.S. Secretary of State tried to play peacemaker in the oil production-and-price war between the desert kingdom and the Kremlin. U.S. oil drillers, meanwhile, looked like they needed pacemakers as crude experienced another heart-stopping week of losses that left the market down nearly 65% on the year.
The Covid-19 mega stimulus, meant to jolt the American economy back to life, did provide oxygen to Wall Street, lifting the Dow, S&P 500 and Nasdaq to their first weekly gains in three.
With stocks rising, gold also scored its best week in almost 12 years despite losing some of its lustre on Friday as investors cashed in on a portion of the yellow metal’s supercharged gains that came on the back of the approval for the $2 trillion package.
Yet, none of that optimism made its way into oil. Crude was instead left to feel the real reason behind the stimulus: the terrifying predicament of the United States becoming No.1 for coronavirus infections, with record jobless claims, potential recession and long doom-and-gloom for oil demand to follow. Not only was oil missing any stimulus feeling - crude was also missing the $3 billion the Trump administration asked as funding for the 77 million barrels to top up the Strategic Petroleum Reserve.
Despite the double-slap, some in the oil market kept their spirits up. "There are two trillion reasons why oil will not go to zero, but we may not be out of the woods yet," Price Futures Group's energy analyst Phil Flynn said, urging his audience to stay long.
Despite crude's relatively cheap price - Friday's low in New York was $20.88 - there's a gnawing feeling it might go even lower. And that's possibly preventing any impulsive support building at the current lows as some actually expect prices in the teens at some point. And blame it all on the Saudis, the favorite target in the market now.
Thursday’s G20 summit video-hosted by Saudi Arabia did not have oil and gas on its agenda, a sign that Riyadh and Moscow weren’t any closer to a detente in their crude production-and-price war.
"We commit to do whatever it takes and to use all available policy tools to minimize the economic and social damage from the pandemic, restore global growth, maintain market stability, and strengthen resilience," G20’s post-conference statement said. Missing was any mention of the elephant in the room: Energy. And this was Saudi Arabia - the world’s single most powerful country for oil - hosting.
Dmitry Peskov, Russia’s spokesman to the summit, was non-committal as well when asked about crude.
A day before the meeting, Pompeo had spoken to Saudi Crown Prince Mohammed bin Salman. According to the State Department, Pompo told MBS, as the future Saudi king is known, that as chair of the G20 and important energy leader, Riyadh “has a real opportunity to rise to the occasion and reassure global energy and financial markets when the world faces serious economic uncertainty.”
Uncoded, it meant: Get your act together with the Russians and start cutting some production, for all of our sakes.
Yet, the rebuff by MBS couldn’t have been louder; a third slap, if you’ll like, for the oil market.
It only proves the Saudis’ steely determination to grow their production by a whopping 30% in March to reach a record 12.3 million barrels per day by end-April.
And if that wasn’t enough to convince the oil crowd to stay bearish, the International Energy Agency’s chief Fatih Birol gave then one more reason: That global oil demand could fall as much as 20 million barrels per day, or by 20%, as 3 billion people across the world remain on lockdown.
Energy Review
West Texas Intermediate, the New York-traded benchmark for U.S. crude prices, settled down $1.09, or 4.8%, on Friday at $21.51 per barrel.
Brent, the London-traded benchmark for crude, settled down $1.41, or 5.4%, at $24.93.
For the week, WTI was down 4.1% while Brent slid 7.6%. For all of March so far, both benchmarks have lost more than 60% - heading for their worst month on record.
Oil posted a fifth straight week of losses amid fear of more demand destruction as U.S. cities and businesses in the country braced for a greater shutdown after America eclipsed China as the nation with the largest number of coronavirus infections.
As of Friday, Johns Hopkins University of Medicine’s real-time tracker for coronavirus infections reported more than 92,000 U.S. Covid-19 cases, overtaking China’s reported cases of under 82,000. By pre-dawn Sunday, the U.S. tally had jumped to almost 125,000, with nearly 2,200 deaths.
Adding to the oil market’s woes, was IEA chief Birol’s warning that global demand for crude could fall by a whopping 20 million bpd.
“This virus hit energy first, and now you have the IEA warning,” said Flynn, the energy analyst at Chicago’s Price Futures Group.
“The massive drop in demand has even complicated the Saudi’s plan to flood the market as buyers of Saudi crude are reportedly looking to cancel oil delay shipments,” Flynn said, referring to the kingdom’s ill-timed production-and-price war with Russian and U.S. shale crude producers.
Separately, Reuters reported that Saudi Arabia was struggling to find customers for its extra oil as demand plummets due to the coronavirus and as freight rates surge.
What started as a surprise Saudi gambit to offer its existing customers, as well as prospects, with virtually unlimited supply of crude at rock-bottom prices - so that it could poach markets from rival Russian and U.S. oil exporters - is having disastrous consequences for the kingdom.
Royal Dutch Shell (LON:RDSa) and U.S. refiners were taking less Saudi crude; Finland’s Neste was not taking any in April; Indian refiners had sought delayed deliveries; and Polish refiners were easing up on purchases, the report said.
Russia has also turned its spigots all the way up for a full-blown production-and-price-war with the Middle East oil power.
“There is no doubt that the Russian and Saudi price war destroyed any shred of credibility they had as the global stabilizer of oil,” Flynn added.
“Instead of acting to soften the economic blow from record demand destruction from the coronavirus, they let their egos allow the oil market to cause the world more economic pain. They used this crisis to gain more power and market share at the expense of the world community that is facing deaths and economic destruction from this virus. Instead of stabilizing the market, they created a situation where oil market volatility is at an all-time high.”
Energy Calendar Ahead
Monday, March 30
Private Genscape data on Cushing oil inventory estimates
Tuesday, April 1
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, April 2
EIA weekly report on oil stockpiles
Thursday, April 3
Friday, April 4
Baker Hughes weekly rig count.
Precious Metals Review
Gold prices dipped Friday but still ended with their best week in almost 12 years after investors cashed in on part of the yellow metal’s supercharged gains on the back of the gigantic U.S. fiscal response to the coronavirus crisis.
Gold was also pressured somewhat by the dollar’s first rebound this week after the passage of the $2 trillion Covid-19 stimulus package in the House of Representatives.
Gold futures for April delivery on New York’s COMEX settled down $26.20, or 1.6%, at $1,625 per ounce. For the week, April gold finished with a 9.5% gain — the best week for a front-month gold futures contract on COMEX since the 13% gain recorded during the week to Sept. 12, 2008.
April gold also raced to as high as $1,699.15 on Tuesday, strengthening its chart position for a take on the $1,700 resistance.
Spot gold, which tracks live trades in bullion, was down $31, or 1.9%, at $1,620.20 by 2:37 PM ET (18:37 GMT). For the week, bullion was up 8.2%.
“I usually say let’s look at the daily gold chart, but this is NOT a technically driven market currently,” Nicholas Degeorge, precious metals strategist at RJO Futures in Chicago, said. “However, let‘s keep it simple and note that this week’s low is $1,608, which could act as support, and if it breaks the $1,700 an ounce levels, hold onto your longs and enjoy the ride!”