The Daily Dose

A recent headline from the Wall Street Journal put crude oil in a bear market on demand fears emanating from the outbreak of the Wuhan coronavirus. A bear market is defined as a 20% contraction from recent peaks, which would put the high-water mark somewhere around early January when Brent was near the $69 per barrel range. Later, the Journal’s editorial board suggested that contagion has set in.

“U.S. manufacturers such as Ford, Apple and Tesla have temporarily halted production. One-sixth of Apple sales and nearly half of chip-maker Qualcomm’s revenues come from China. So do 80% of active ingredients used by drug-makers to produce finished medicines. Because China is the world’s largest manufacturer and an enormous consumer market, the economic freeze will disrupt supply chains and reduce corporate earnings,” editors wrote.

When China coughs, the rest of the world catches the cold, the editors added. Chevron last week turned in disappointing results for the fourth quarter, but indicated that total liquid fuel production had increased, driven in large part by US shale. On Tuesday, British supermajor BP raised it dividends, but reported a loss for the quarter. Shares of BP were up more than 4% in early Tuesday trading on the news.

Elsewhere, OPEC delegates are meeting in Vienna to consider their response to the demand destruction supposedly triggered by the coronavirus. If we follow fourth quarter reports from the likes of Chevron, and consider the steady gains in US inventories, OPEC may have a case to cut deeper. Rumors surfaced Monday that Saudi Arabia was pushing for cuts equivalent to sidelining a fully-producing Libya from the market. But on Tuesday, Russian Oil Minister Alexander Novak said it may be premature to take formal action.

“There are lots of uncertainties, maybe those are panic attacks,” he said.

Indeed, there may be some scapegoating of the coronavirus. Fourth quarter woes from energy companies reporting thus far are reflecting a market already under pressure from US-Chinese trade tensions and manufacturing weakness. The first quarter, meanwhile, is typically a quiet one, leaving the door open for the amplification of even a minor market shock. 

In US politics, a glitch delayed the outcome of the Iowa Caucuses. Left-leaning Bernie Sanders reported that internal figures showed he was the winner, though Pete Buttigieg was also upbeat on the results. For the markets, a Sanders win may be unsettling to some given his campaign pledges of breaking up big banks, increasing taxes on the wealthy and hiking the minimum wage. If his internal figures are accurate, the market could move into the red in response. The SNAFU alone, meanwhile, is sure to give President Trump ample ammunition to fire at his rivals. 

Crude oil prices were in the black at the start of the trading day, though expect OPEC rumors to make for a bumpy ride. Uncertainty from the cartel could spoil the rally. Later, the American Petroleum Institute releases its data on US crude oil inventories and any signs of continued glut could drag on prices. Intra-day patterns on Brent were noisy on Tuesday and expect the volatility to continue.