03 June 2020

Oil Blazes Again on Hopes of Output Cuts

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News shaping
the markets today

     

What’s happening: Crude oil futures surged on Tuesday to record their highest close in around three months.

What happened: Crude oil has suffered a significant blow with demand remaining low due to travel restrictions imposed by governments around the world to curb the coronavirus outbreak. Some recovery has been made recently with the easing of lockdown measures and hopes of the global economy inching back to normalcy.

Crude prices were also supported by the OPEC (Organization of the Petroleum Exporting Countries) and its allies agreeing to the first round of deep production cuts. This, however, is scheduled to expire at the end of June, with the cuts tapering from July to reach 7.7 million barrels per day by the end of the year.

The progress has been more gradual than expected, with new virus cases rising with every step towards reopening. While global economies are still trying to recover from the crisis, speculations of major oil producers extending the output cuts beyond June are circulating.

On the other hand, tensions between the US and China are likely to exert pressure on crude prices, especially if no resolution is reached between the world’s two largest economies.

Why it matters: With oil prices falling to negative territory earlier this year, the OPEC and its allies reached a deal to cut production by 9.7 million barrels per day till the end of June. Although crude prices have risen since then, they continue to be depressed due to soft demand. Against this backdrop, Saudi Arabia has been urging other group nations to extend the output cuts till the end of the third quarter.

With no official comments from the group nations, there is speculations on OPEC and Russia agreeing to extend their existing production cuts for another three months. The conference call between the OPEC and its allies is scheduled for Thursday. If some nations oppose the extension, the cuts will begin being tapered off starting July.

The steady rise in gasoline demand in the US and declining crude inventories at its Cushing, Oklahoma storage hub are supporting crude prices for now. Late Tuesday, the API (American Petroleum Institute) reported a decline of 483,000 barrels in crude oil inventories for the week ending May 29.

Meanwhile, growing tensions between Washington and Beijing could exert pressure on crude prices, with China halting the import of US soybeans. There are widespread fears of the strained relations forcing the two countries to reconsider their phase-one trade deal.

WTI (West Texas Intermediate crude) for July delivery spiked 3.9% to settle at $36.81 per barrel in New York, its highest settlement since March 6. Global benchmark Brent for August also climbed 3.3% at $39.57 a barrel.

What to watch: With the gradual reopening of economies, including the US, there are hopes of a strong rebound in oil demand. Investors will also be keeping an eye on the OPEC+ meeting, anticipating an extension of the existing output cuts.

Traders await the EIA’s (Energy Information Administration) weekly report on petroleum supplies. Analysts expect a rise of 3.5 million barrels in petroleum supplies for the week ending May 29. Gasoline stockpiles are likely to drop 300,000 barrels, while distillate supplies may increase 2.8 million barrels.

The Markets Today

     

The Australian dollar will be in focus today, after the currency touched a five-month high versus the US dollar.

Context: The Australian currency surged versus the greenback as US traders remained cautious due to escalating riots across the country and President Donald Trump threatening to deploy the army to curtail protestors and mass looting.

Details: After skyrocketing as much as 25% from its March lows, the Australian dollar traded at its strongest since January 7.

The rise in iron prices supported the currency, as a strong recovery in China’s manufacturing lifted demand for the metal, which is one of Australia’s main exports.

Sentiment was also lifted by the Commonwealth Bank services PMI improving to 26.9 in May, from 19.5 in April, although the latest reading shows a contraction.

Investors shrugged off news of the Australian economy shrinking for the first time since the first quarter of 2011, contracting 0.3%. This follows the 0.5% growth recorded in the previous quarter. The reading surpassed market expectations for a 0.4% contraction.

The Australian dollar gained 0.66% to 0.69417 versus the greenback, reaching a five-month high of 0.69822 on Wednesday.

What to watch: Investors will continue to assess the speed of economic recovery after the relaxation of lockdown restrictions. Looking ahead, focus could be on economic reports from the US, including ISM non-manufacturing data and factory orders. Retail sales data from Australia, scheduled for release tomorrow, could also grab market attention with the coronavirus-led restrictions likely to result in retail sales declining 17.9% in April.

Markets will also be keeping an eye on the coronavirus numbers, with total cases reaching 6,383,800 globally. Australia has confirmed around 7,220 cases so far, with over 100 deaths.

Other Markets: European indices were trading higher at 9am GMT, with the FTSE 100, German 30 and French 40 up by 0.9%, 1.1% and 1.2%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Brazil's industrial production, services PMI and composite PMI, Canada’s labour productivity and Bank of Canada’s interest rate decision as well as the US MBA mortgage applications, ADP employment change, services PMI, composite PMI, ISM non-manufacturing PMI and factory orders.

 

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