The recent slump in Brent Crude prices follows a similar pattern of past slowdowns in global factory output, sparking fears that the market’s fear is not only based on the coronavirus
The recent slump in Brent Crude prices follows a similar pattern of past slowdowns in global factory output, sparking fears that the market’s fear is not only based on the coronavirus
Oil prices slumped by 14 percent in just one week after the market caught the coronavirus panic and feared a significant slowdown in global economy as the outbreak spread to more than 50 countries.
The oil market joined equity markets in hefty sell-offs as participants feared global oil demand will suffer even more than initially expected from a coronavirus-inflicted economic slowdown.
Hedge funds and other money managers have been sellers of the equivalent of more than 450 million barrels of the six most important petroleum futures and options since the beginning of 2020, according to estimates from exchanges by Reuters market analyst John Kemp.
The coronavirus outbreak dashed the oil market’s hopes from earlier this year that the phase one U.S.-China trade deal would help global oil demand growth to pick up pace in 2020 from relatively low growth in 2019, due to the trade war and lower growth in China’s economy.
Last week’s sell-offs in oil came after the short selling in oil had slowed down for three consecutive weeks in the week to February 18.
In the week to February 25, hedge funds and other money managers covered shorts in WTI Crude and Brent Crude. The combined net long position—the difference between bullish and bearish bets—actually increased by 33,000 lots to 411,000 lots, and most of the rise was due to short-covering, according to Ole Hansen, Head of Commodity Strategy at Saxo Bank.
This picture of the market, however, was a snapshot as of the week ending February 25, while the carnage on the markets continued the entire week through February 28, so the increased sell-off will show in the Commitment of Traders (COT) report with data to March 3 on Friday. Related: This Supermajor Is Diving Into The Green Hydrogen Game
But the sentiment in the market has been evident for weeks—traders are pricing in increasingly gloomy forecasts about oil demand growth and economic activity due to the coronavirus outbreak.
Traders and investors fled to safer assets last week, and the yield on the 10-year U.S. Treasury note dropped to a record low. The Fed is signaling that a rate cut is coming soon, with Goldman Sachs even expecting such a cut before the March 17-18 Fed meeting.
Central banks around the world are widely expected step up rate cuts to help economies amid the slowdown in manufacturing activity.
The recent slump in Brent Crude prices follows a similar pattern of past slowdowns in global factory output, such as in the middle of last year or in 2015/2016, and the recessions in 2001-2002 and 2008-2009, Reuters’ Kemp says.
The carnage in oil markets last week came just a few days before OPEC and its Russia-led non-OPEC partners meet in Vienna on March 5-6 to discuss deeper cuts in response to the price slump and slowing global oil demand. This puts further pressure on the OPEC+ coalition to come up with a unified position of deeper cuts in order to at least prevent another week(s) of plunging oil prices.
“Russia has up until now been holding back, but with oil priced in Russian Ruble falling to an October 2017 low, we may see an increased interest from Moscow in striking a deal,” Saxo Bank’s Hansen said on Friday.
Russia’s President Vladimir Putin told ministers and heads of Russia’s leading oil and gas companies on Sunday that “the current oil prices are acceptable for the Russian budget and our economy.”
Yet, Brent Crude falling to $50 becomes dangerously close to Russia’s breakeven price of $42.40 Brent, especially if OPEC+ do not agree on deeper cuts and send another bearish message of sell-off to the market.
Despite the fact that Russia’s international reserves are enough, “all this does not remove the need for our joint actions including with our foreign partners,” Putin said.
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The OPEC+ format “has already proved to be an efficient tool for ensuring long-term stability in the global energy markets. It has given us additional budget revenues and – this is key – offered possibilities for our oil extracting companies to invest in promising development projects,” Putin said in comments suggesting he continues to view the cooperation with OPEC as positive.
The oil price rout in recent weeks calls for additional action from OPEC and allies just to try to keep oil prices from falling further.
“We believe that anything that falls short of the OPEC+ Joint Technical Committee recommendation of 600Mbbls/d of additional cuts over 2Q20, and extending the current deal through to year-end, will be taken as bearish,” ING strategists Warren Patterson and Wenyu Yao said on Monday.
By Tsvetana Paraskova for Oilprice.com
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