The Daily Dose

Crude oil prices continue to face pressure from OPEC+ uncertainty and demand destruction. Oil may be in a bear market, though forward-month prices continue to hover around $55 per barrel. On Friday, Russia’s foreign minister seemed to express support for deeper production cuts even as the country’s central bank frets over the persistent global economic slowdown.

Brent crude oil was trading at $54.44 per barrel as of 8 a.m. EST, down some 0.9% from the previous close.

Parties to a joint technical committee for the Organization of Petroleum Exporting Countries recommended additional cuts of some 600,000 barrels per day, about 0.6% of global supply. Brent came under pressure earlier this week after Russia expressed reservations about knee-jerk reactions to the demand pressures from the outbreak of the coronavirus. Cuts, after all, would be jeopardized should Libyan output return to normal.

Speaking in Mexico, Russian Foreign Minister Sergei Lavrov said he supports the idea of deeper cuts, according to the translation from Spanish media. Elsewhere, however, Lavrov was quoted as saying the Kremlin was interested in “optimal measures” that would be “acceptable to all oil exporters.”

A policy move by OPEC+ that would be “acceptable to all oil exporters” may depend in part on economics. Some parties to the agreement need Brent at around $100 per barrel, while others can get by in the current market. Russia, which tends to manage okay in a weaker market, is feeling the constraints from trade pressures and price weakness.

“Risks of a substantial global economic slowdown persist,” a spokesperson for the Russian Central Bank said Friday.

The bank said it expected GDP to grow by as much as 2% this year and as much as 3% by 2022. “However, reduced global economic growth expected over the forecast horizon will continue to exert a constraining impact on growth of the Russian economy,” the statement continued.

Central Bank statements may be more telling than interpretations of Lavrov’s comments from Mexico. OPEC+ may have overplayed its hand in the midst of the coronavirus scare that peaked at the end of January. The production group may need a Goldilocks moment to control the precipitous decline in the price of crude oil. Too much, and economic weakness would be compounded by high oil prices. Too little, and OPEC looks like it lost control. S&P Global Platts reported Friday that OPEC production in January was 470,000 bpd lower than the previous month, though much of that was due to a blockade in Libya. Should ports reopen there, Libyan exports could tip the scales more toward the supply-side, creating headwinds for the price of oil.

In the markets, US jobs surprised on the upside, adding some 225,000 to payrolls in January. Manufacturing, however, showed weakness, with 12,000 lost from sector headcounts last month. Overtime in manufacturing also slowed, showing workers were putting in fewer hours. In Europe, German industrial production for December was down 6.8% year-on-year, coming in far worse than expected.

In political news, tensions between the United States and the Venezuelan government of Nicolas Maduro escalated after police in Caracas detained executives from US refiner Citgo. Their arrests followed the appearance of opposition leader Juan Guiado at President Trump’s annual State of the Union address earlier this week. Elsewhere in Latin America, Russia’s foreign minister said he was looking forward to expanding the economic partnership with Mexico. Already a major player in the region, a bigger Russian footprint in Latin America would be a political coup of sorts.

The Daily Dose

Crude oil prices were again bouncing around the $55 per barrel mark following the selloff that greeted the 2.5% rally for Brent in the previous session. The standstill for Brent may be reflective of the confusion from the results of a Vienna meeting for the joint committee monitoring OPEC+ production restraints. The committee recommended further cuts of around 600,000 barrels per day, but Russia’s reluctance raised concerns about implementation. 

The 600,000 bpd proposal would trim the glut expected during the first quarter and counter some of the demand destruction emanating from general economic malaise and the short-term contraction from the coronavirus. But the bears are ruling the day.

The price for Brent crude oil as of 8 a.m. EST was $55.09 per barrel, down some 0.36% from the close of trading Wednesday and falling fast.

The 15 minutes of fame for the coronavirus may be waning. Short-term implications, however, are readily apparent in the Chinese economy, the second-largest in the world after the United States. OPEC expects oil demand to fall by some 200,000 bpd and, according to Reuters, sales of crude oil and liquefied natural gas “almost ground to a halt this week” because of demand contraction. Demand during the first quarter is usually low and inactivity could be extended given China’s decision to push the Lunar New Year holiday season into February.

What’s moving the market today, however, is not the coronavirus so much as Russia’s reluctance to get on board with Saudi Arabia on deeper production cuts. OPEC on Wednesday announced plans for an extraordinary meeting in March to consider the current market situation, though not without some reluctance. S&P Global Platts reported that “beyond the physical market practicalities, the politics of agreeing on deeper cuts could be difficult.” One particular difficulty may be in considering an eventual return of Libyan production. Internal battles for control in Libya led to port closures, sidelining more than half of its full potential of some 1 million bpd in exports. A Libyan return would offset the latest cut proposal from OPEC and contribute to supply-side pressures.

The joint committee, which advises rather than sets policy for OPEC, continues its meetings into Thursday, so chatter out of Vienna will certainly be a market factor. Some movement came early in the session on word that China was easing some tariffs on US goods, though reports of a “disaster-related clause” in the so-called Phase 1 trade deal may render that moot. Elsewhere, French supermajor Total announced a 6% increase in annual dividends, surprising the market on the upside. Chairman and CEO Patrick Pouyanne said fourth quarter performance was strong “despite the drop in oil prices” and a similar contraction in natural gas.

US Treasury Secretary Steven Mnuchin added fuels to the bears on Thursday by saying there would be obvious economic impacts from the coronavirus. In geopolitical news, Austrian energy company OMV reportedly stood pat on its decision to continue backing the second leg of the Nord Stream 2 pipeline, bucking pressure from a US government concerned by Russian influence in the European energy market. US President Donald Trump, meanwhile, was acquitted by the Senate on impeachment charges and is all-but certain to make some noise on Twitter.

 

The Daily Dose

Crude oil prices were in full rally mode early Wednesday on word of a possible breakthrough in the effort to control the outbreak of the novel coronavirus. A spokesperson for the World Health Organization, however, said “there are no known effective therapeutics” to treat the virus. Despite the cold-water statement, a Tuesday update on the outbreak from the global health agency found no new countries reported cases of the 2019-nCoV over the last 24 hours.

Brent as of 8 a.m. EST was oscillating around $55 per barrel. The global benchmark was up 2.5% from Tuesday’s close to $55.22 per barrel.

The coronavirus has been blamed for demand destruction, though economic pressures have been manifesting at least since the fourth quarter. Giving support to the early-morning rally was an upbeat position on the economy taken during US President Trump’s State of the Union address Tuesday evening. “An economic miracle is taking place in the United States,” the president declared.

Propped up by sweeping tax breaks, consumer confidence in the world’s largest economy is high, though raw data show spending levels are not running parallel to the optimistic sentiment. Demand in the US market is slowing. Figures from the American Petroleum Institute showed US crude oil supplies increased some 4.2 million barrels for the week ending January 31. Gasoline inventories grew by 2 million barrels, though distillates were drained by 1.8 million barrels. EIA data out Wednesday morning are expected to show similar results. 

The consistent build in US inventories shows demand has been problematic. On the impact of the coronavirus, demand implications run the gamut. According to Bloomberg, OPEC is expecting a decline in demand of about 400,000 barrels per day over six months in its worst-case scenario. S&P Global Platts saw things much worse, forecasting a demand hit of about 1 million bpd. If OPEC keeps pumping oil as it’s been, there would be a 600,000 bpd glut in the first quarter and a 1 million bpd glut in the second.

A roundup of the morning news shows Germany’s Purchasing Managers’ Index increased from 52.9 in December to 54.2 last month. ADP reported January payrolls grew by 291,000 jobs from December, though jobs in the natural resources and mining sectors of the US economy showed contraction. In the world, Iran is seemingly on a regional détente push and the US Senate is expected to acquit Trump on two impeachment charges. With good ADP numbers and emboldened by the SOTU, a Trump Bump is expected in Wednesday trading, though it could be a bumpy ride, particularly given the likelihood of OPEC chatter.