By Barani Krishnan
Investing.com -- Oil traders sent crude prices up 5% this week despite every sign out there that demand for energy will get worse before it gets better.
It was the first gain in six weeks since the year began. Miraculously, even January’s near-war situation between Iran and the U.S. - sparked by the Trump administration’s assassination of Iranian general Qassem Soleimani - didn’t result in a weekly gain.
The largely unexpected four-day run-up came as China’s statistics from the Covid-19 went from worse-to-better-to-worse with each passing day. Oil market sentiment was no different either as Russia kept OPEC on a leash - stirring speculation of a “no-yes-no” to whether Moscow will contribute to the new 600,000 barrels-per-day cut proposed by the cartel.
“There’s no doubt that as China continues to struggle with the coronavirus, it will continue to experience a demand drop in crude that could only get more significant by the day,” said Tariq Zahir, managing member at the oil-focused Tyche Capital Advisors in New York.
“And if the virus spreads further in Europe and the U.S., we can expect the demand for crude to be hit further,” added Zahir. “Worldwide growth is already impacted and supply chains could become more impacted. Yet, crude prices are up substantially this week. Whether this will be a V-shaped recovery remains to be seen.”
Despite the gloomy outlook, there were some rays of hope that got oil bulls hopes up.
One was the Friday report that China’s smaller, independent refineries — known as “teapots” — were back to buying some crude amid the perceived crash in Chinese energy consumption.
Among China’s independent refiners, Shandong Shouguang Luqing Petrochemical Co. snapped up as many as seven cargoes from Russia, Angola and Gabon for March and April, while Sinochem Hongrun Petrochemical Co. bought a shipment from Gabon, Bloomberg reported.
Not all were optimistic about that story though.
“While crude run rates continue to drop in China with teapot rates under 50%, it makes me wonder if the refiners there are just catching up on their buying or getting long,” said Scott Shelton, energy futures broker at ICAP (LON:NXGN) in Durham, North Carolina.
Also propping the market was speculation that Russia will ultimately agree to OPEC’s new cuts — despite the air of hesitance initially put up by President Vladimir Putin. The Kremlin chief appeared to show great sensitivity last week to caution raised by Moscow’s energy insiders that cuts by Russia will only benefit U.S. oil drillers who have no alliance with OPEC.
Helima Croft, head of global commodity strategy at RBC Capital Markets, said in a note that she suspected “Putin will once again overrule his energy executives at the 11th hour, and sign on the dotted line when the ministers meet on March 5” at the so-called OPEC+ meeting in Vienna.
Still, Putin’s “public hand-wringing” before OPEC “may be effectively deployed in negotiations, to reduce Russia’s overall output obligations” to the cuts, said Croft.
On a larger front, there debate this week on whether global demand for energy may survive the worst from the epidemic that has killed nearly 1,700 people in China alone and infected about 68,000 in the world’s second-largest economy,
Outside of China there have been more than 500 cases in nearly 30 countries, with four people dying - one each in France, Hong Kong, the Philippines and Japan.
Fear that the downside in oil may have been overstated came as the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA) and OPEC all published different estimates on what the impact on oil could be from the outbreak.
To oil bulls, the disparity in the numbers showed that none of the three had a definitive read on the impact - a situation that should be taken positively.
Bloomberg, in an analysis, remarked wryly that OPEC would be inclined to understate the impact on oil from the Covid-19, given its desperation to get crude prices back up, while the IEA, which represents consumers, will naturally say there’s too much oil floating around.
“Somebody will have adjustments to make,” Bloomberg noted.
According to OPEC, China’s first-quarter oil demand will fall just by 160,000 bpd from last month’s estimate and consumption will still be up by 140,000 bpd over the same period in 2019.
The Paris-based IEA believes that global oil demand for the first quarter will be 1.3 million barrels a day lower than thought a month ago.
The Washington-based EIA, meanwhile, forecasts that total global supply of energy liquids will average 101.97 million bpd in 2020 while demand averages 101.74 million bpd — a 230,000 bpd gap. Last month, the EIA forecast total supply will average 102.37 million bpd versus an average demand of 102.11 million bpd — a 260,000 bpd difference.
Gold notched a weekly gain too as confusion over China’s accounting of the Covid-19 helped the yellow metal post its seventh weekly gain in eight and return to the bullish $1,580 perch.
But guessing the market’s near-term direction remains difficult for investors due to the sheer uncertainty of the epidemic, and the alternative safe-haven offered by the dollar, said analysts.
Buying from “teapots”, bets that Russia will submit to OPEC and optimism that global oil demand won’t totally cave on the virus outbreak combined to give crude its first weekly gain in six.
Brent, the global benchmark for crude, settled at $57.32 per barrel, up 98 cents, or 1.7%, on the day. For the week, it rose 5.2%.
West Texas Intermediate, the U.S. crude benchmark, settled at $52.05, up 63 cents, or 1.2%, on the day. It rose 3.4% on the week.
For the year, Brent remained down 13% while WTI showed a 14% decline.
Energy Calendar Ahead
Tuesday, Feb 18
Private Genscape data on Cushing oil inventory estimates
Wednesday, Feb 19
American Petroleum Institute weekly report on oil stockpiles.
Thursday, Feb 20
EIA weekly report on oil stockpiles
Friday, Feb 21
Baker Hughes weekly rig count.
Precious Metals Review
Gold futures for April delivery on New York’s COMEX settled Friday’s trade up $7.60, or nearly 1%, at $1586.40 per ounce. It also gained almost 1% on the week.
Spot gold, which tracks live trades in bullion, however, ended down 21 cents, or 0.01%, at $1,584.11. For the week, bullion rose 0.9%.
“The dollar index and headlines on U.S. politics, interest rate changes and the stock market have added to the coronavirus news, resulting in gold’s see-saw this week,” said George Gero, precious metals analyst at RBC
Wealth Management in New York. “But don’t count out gold as it’s serving well as a hedge to the Covid-19 despite the dollar’s strength.”
The dollar index, which pits the greenback against a basket of six currencies, showed a reading of 99, up 0.4% on the week.
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