Wednesday, March 11, 2020

Oil Surges Following Biggest Rout in 30 Years

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What’s happening: Oil prices rebounded on Tuesday, after having suffered the biggest decline since 1991. Oil prices were lifted by prospects of various governments announcing economic stimulus and the possibility of Russia holding talks with the OPEC.

What happened: After recording its worst decline since the 1991 Gulf War, crude oil bounced back and gained around 10% on Tuesday. Sentiment improved after reports of Russian Energy Minister Alexander Novak suggesting the possibility of Moscow holding talks with the OPEC (Organization of the Petroleum Exporting Countries) to decide on steps to curtail the decline in oil prices.

Investors also experienced some relief as US President Donald Trump announced plans to provide “a possible payroll tax cut or relief” to stabilize markets.

Why it matters: The failure to reach a deal between the OPEC and Russia had led to a dramatic decline in prices on Monday. The OPEC had suggested additional production cuts to address the oil oversupply situation. However, Moscow had refused to support this decision, saying that the impact of the virus outbreak on global demand was too early to calculate.

With the existing deal between the OPEC and its allies expiring in March, the organization’s de facto leader Saudi Arabia had cut its OSP (official selling price) for every oil grade for April delivery. The world's biggest oil exporter also announced plans to increase production to 12.3 million bpd (barrels per day) for April, much higher than the existing level of 9.7 million bpd. Russia wanted to follow suit, increasing production by up to 300,000 barrels per day.

Although the Russian Energy Minister has indicated the possibility of talks, he has also noted that the country has the capability to boost output up to 500,000 barrels per day.

The move to increase production comes at a time when the markets are already facing a demand shortfall due to the spread of coronavirus across the globe. In the US, 10 states have declared a “state of emergency” to control the spread of COVID-19. There are at least 118,745 confirmed cases of coronavirus globally.

The API (American Petroleum Institute) late Tuesday reported a rise of 6.4 million barrels in US crude inventories for the week ended March 6.

US WTI crude oil futures jumped 10.4% to settle at $34.36 per barrel on Tuesday, while Brent crude rose 8.3% to close at $37.22 per barrel. Crude oil was trading down 1.83% at $33.73 at 9:10am GMT today.

What to watch: Investors will look out for further announcements by Saudi Arabia, Russia and other major oil producers in hopes of production cuts to arrest the price decline. The market also awaits the release of oil stockpile report from the US Energy Information Administration. Inventories of crude oil in the US are expected to have increased by 2.266 million barrels last week, versus a previous rise of 0.785 million barrels.

The Markets Today

     

US markets will remain in focus today, with all indices closing higher on Tuesday after a volatile session.

Context: The Dow surged around 1,200 points on Tuesday, delivering its third-highest gain in points on record after President Trump announced plans to take some “major steps” to address the possibility of an economic slowdown due to the coronavirus outbreak.

Details: US President Donald Trump announced “a possible payroll tax cut or relief” by persuading the Congress for a fiscal stimulus package. Global markets have been facing sharp declines in recent weeks due to the rapid spread of coronavirus around the world, resulting in widespread supply chain disruptions and the enforcement of drastic lockdown measures in Italy.

Markets are now expecting monetary easing from the ECB (European Central Bank) at its meeting on Thursday. Investors also expect the US Federal Reserve to cut rates further at its policy meeting scheduled for next week. The Bank of England cut rates by 50 basis points this morning.

The number of coronavirus cases exceeded 118,000 worldwide, as the outbreak spread to more countries, causing further economic disruption.

US stocks closed higher on Tuesday, with the Dow rising 1,167 points to 25,105 and the Nasdaq 100 up 5% to 8,344.25. The S&P 500 gained 4.9% to close at 2,882.23. The 30-stock benchmark had shed more than 2,000 points on Monday, with all three benchmarks suffering their largest single-day percentage declines since the financial crisis of 2008.

Oil stocks made some recovery during Tuesday’s trading, with the midsized Occidental Petroleum surging around 15% despite cutting its dividend and capital budget. Banking stocks, including JPMorgan Chase and Bank of America, also surged around 8% each. Airline and cruise stocks climbed after President Trump announced plans to provide aid to companies in these segments. Shares of American Airlines and United Airlines both climbed more than 12%, while Carnival’s stock rose 8%.

In other news, yields on the 10-year US note, which dropped to a record low on Monday, rose 30 basis points to 0.80% on Tuesday.

Why it matters: There seems to be downward pressure again on US markets, with stock futures pointing to a lower start on Wall Street. Investors await economic releases from the country, including reports on inflation rate and budget statement.

What to watch: US core consumer prices, which rose 0.2% in January, are expected to remain unchanged in February. Markets are expecting an exponential increase in America’s budget deficit, from $32.6 billion in January to $236.3 billion in February.

Other Market: Most European indices were trading higher on Monday, with the FTSE 100, German 30 and French 40 up 0.69%, 1.62% and 1.52%, respectively, at 9:30am GMT today.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

News shaping
the markets today

     

What else to watch today

     

Brazil's consumer prices, Canada’s capacity utilization as well as the US MBA mortgage applications.