By Barani Krishnan
Investing.com - When will sense return to the oil trade?
It’s a question that begs asking, especially this week’s jump of 9% or more in U.S. crude and Brent, after the previous week’s drop of over 8% on both.
Commodity markets are often little more than cycles - until, of course, an extraordinary event like the Covid-19 comes along. As the week of June 15th dawned, it seemed like the direction in oil was finally turning from the recovery rally since the end of April that put crude virtually in a one-way track: Up.
The reversal in trend appeared likely as the market seemed to be paying attention at last to the record stockpiles in U.S. crude that hedge funds and other bullish investors had ignored for weeks.
Yet, in a bizarre turn of events possible only in oil, crude prices recouped all they lost from the previous week. OPEC’s noise of heightened pledges to production cuts — an all-too-familiar routine of promises made to be broken each time - drowned out the voices of concern in the market about U.S. crude stockpiles, which rose by 1.2 million barrels on the week to hit another record high at 539.3 million.
And while the broader pledges to cuts continued, Russia, the top Saudi ally in the enlarged OPEC+ alliance, suggested it will not reduce production beyond July. Kirill Dmitriev, the head of Russia’s sovereign wealth fund, told Moscow’s RBC Daily that he saw no point in extending strict global output cuts in oil as demand for fuel seemed to be recovering from the depths of the coronavirus crisis.
Despite that, hedge funds were swayed by Saudi attempts to shame serial offenders in the OPEC+ pact and extract from them promises for more compliance to cuts even as the continuance of the pact looked doubtful without Russian adherence.
OPEC+ compliance for cuts stood at 87% in May. The Saudis are worried that any pronouncements of higher output will sacrifice the near 300% gain in WTI and 170% rise in Brent since end-April. This is especially so with demand for fuel remaining far below pre-pandemic levels due to limited flying, driving and trucking activity,
While this week's OPEC+ meeting did not make recommendations for production levels in August, it “focused on pushing non-compliant countries to show convincing plans on how they plan to compensate for not respecting their quotas in May and June”, said Olivier Jakob of Zug, Switzerland-based oil consultancy PetroMatrix.
Jakob also noted that “as the flat price moves higher, the enthusiasm of Russia for production cuts moves lower”.
On the hook for more production cuts were Iraq and Kazakhstan, which submitted detailed plans on cuts in the coming months after overstepping production quotas in May.
Others guilty of overproducing, including Nigeria and Angola, will need to submit plans to rein in their output by June 22, according to the Joint Ministerial Monitoring Committee tasked with overseeing the OPEC+ production cut accord.
Fears of a second wave of coronavirus infections in economically-active countries also kept OPEC on tenterhooks.
The South and West regions of the United States have seen worrying spikes in new Covid-19 caseloads and hospitalizations over the past week. In China, a new outbreak in Beijing prompted authorities to raise their official coronavirus emergency response back to Level II, as they raced to stem what one called an "extremely severe" situation. The adjustment to the Chinese capital’s response level came just 10 days after a downgrade to Level III.
The Atlantic storm calendar will also be closely monitored for disruptions to crude processing, said analysts.
"Hurricane season is yet another variable that could tip the tenuous recovery of the oil market back into more bearish pricing territory," Erika Coombs at BTU Analytics said.
With the latest weekly win – the eighth in the past nine weeks – prolonging the WTI rally will become harder once the Russians begin raising production, said Edward Moya at New York’s Oanda. “Oil prices at best might have another dollar or two to climb higher” in such a situation, he said.
In gold, the yellow metal hit 2-week highs, decisively crossing the $1,750 per ounce mark, after Goldman Sachs revised upward its 12-month forecast by 11% to $2,000 per ounce over the next 12 months.
Goldman said its upgrade was based on the lower-for-longer U.S. rate regime and currency debasement worry, despite various economies and developed markets emerging from Covid-19 lockdowns.
“Continued growth normalization should be welcomed by gold bugs, as a reversal in safe-haven flows should be offset by investment demand, with real rates significantly suppressed,” TD Securities said in a note.
Energy Markets Review
Oil prices rose as bulls in the market tried to reignite the rally in crude by focusing on signs that fuel demand may be improving, despite concerns of a second wave of coronavirus infections.
Oil producers who cheated on output cuts initially pledged to the OPEC+ alliance also renewed their promise to do better, providing further support to the market.
The Energy Information Administration said U.S. crude inventories rose by 1.2 million barrels last week to a hitherto unseen level of 539.3 million barrels.
While the positive response to the OPEC maneuvers late in the week was highly questionable, the EIA did issue other weekly data favorable to the demand dynamics of U.S. petroleum.
The EIA said gasoline stockpiles eased by 1.66 million barrels last week, versus expectations for a drop of 170,000 declines.
Distillate stockpiles, led by diesel, fell by 1.35 million barrels versus forecasts for a 2.43-million barrel build.
In terms of production, U.S. oil output fell to an estimated 10.5 million barrels per day, down 20 percent from record highs of 13.1 million barrels daily hit three months ago.
But some were less optimistic in their outlook.
"We maintain our view that while we expect prices to continue increasing through the year, oil is expected to see short-term bearish pressures as we head towards the end of Q2," Singapore-based OCBC said in a note.
New York-traded West Texas Intermediate, the benchmark for U.S. crude, settled up 61 cents, or 1.6%, at $39.45 per barrel on Friday.
London-traded Brent, the global benchmark for oil, settled up $0.45, or 1.0%, at $41.96.
For the week, it rose 9.6%, after the previous week’s drop of 8.3%. Brent gained 8.9%, following the previous slide of 8.5%.
Energy Calendar Ahead
Monday, June 22
Private estimates on Cushing oil inventories from Genscape.
Tuesday, June 23
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, June 24
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, June 25
EIA weekly report on natural gas storage
Friday, June 26
Baker Hughes weekly survey on U.S. oil rigs
Precious Metals Markets Review
U.S. gold futures for August delivery settled up $25.40, or 1.5%, at $1,756.5 per ounce on Friday, after a two-week high at $1,760.90. For the week, the gold futures benchmark rose $15.70, or nearly 1%.
Spot gold, which tracks real-time trades in bullion, settled at $1,744.07, up $21.09 or 1.2%. For the week, it rose 0.9%.
Gold rallied after Goldman Sachs’ upward revision of its 12-month forecast for the yellow metal from $1,800 an ounce to $2,000.Goldman also lifted its three-month view of gold to $1,800 from 1,600. It placed its six-month forecast at $1,900 from a previous $1,650.
“Gold investment demand tends to grow into the early stage of the economic recovery, driven by continued debasement concerns and lower real rates. Simultaneously, we see a material comeback from [emerging market] consumer demand boosted by easing of lockdowns and a weaker dollar,” Goldman analysts wrote in a note.
They also estimated that ‘fear’ driven investment demand was responsible for the 18% gain of the precious metal in 2020. However, they also conceded that a negative shock to ‘wealth’ resulted in an 8% drag on their call. They put the net effect at about 10%, which also coincides with gold’s year-to-date rise of around 13%.
* Disclaimer: Barani Krishnan does not own or hold a position in the commodities or securities he writes about.