Against a backdrop of worsening global infections from COVID-19 variants, oil appears to have one thing to count on: the optimistic US story.
Crude prices got off to a weak start in Asia on Monday on concerns that surging caseloads of coronavirus infections in India and other countries will lead to stronger mitigation measures and hit economic activity.
Yet, oil might see more volatility instead of a continued slide in prices, especially if there’s a recurrence of last week’s momentum-boosting drivers.
Oil prices jumped more than 6% last week, even as Europe to India convulsed from new-strain, coronavirus case loads and US health authorities suspended use of Johnson & Johnson's (NYSE:JNJ) crisis-laden COVID-19 vaccine. Reason: US crude drawdowns that came in way above expectations, accompanied by roaring US economic data.
US crude stockpiles dropped 5.899 million barrels for the week ended Apr. 9, compared with analysts' expectations for a draw of 2.889 million barrels, the US Energy Information Administration said.
Distillate stockpiles, which include diesel and heating oil, dropped 2.083 million barrels in the week against expectations for a build of 971,000 barrels, the EIA data showed.
And while gasoline inventories rose, the rise of 309,000 barrels was way below the expected draw of 786,000 barrels.
A rash of US economic data last week also exceeded forecasts, fueling hopes for faster-than-expected recovery from the ravages of the pandemic.
The Commerce Department said US retail sales jumped 9.8% in March, above the forecast growth of 5.8%, as consumers spent stimulus checks sent out last month by the Biden administration as relief for the pandemic.
The Labor Department, meanwhile, announced a staggering 25% drop in weekly filings of jobless benefits, indicating that the labor market may be turning the corner too.
Eyes Again On This Week’s US Economy, EIA Data
This week, the National Association of Realtors will release data on existing home sales for March on Thursday at 10:00AM ET. The consensus forecast is that the report will show existing home sales rose 0.9% to reach 6.18 million, following a decline of 6.6% in February.
On Friday, the Commerce Department will publish a report on new home sales. The data—due at 10:00AM ET—is expected to show an increase of 12.0% in March to 885,000, following a steep drop of 18.2% in the preceding month.
IHS Markit's composite flash US Purchasing Managers' Index (PMI) for April is also due at 9:45AM ET on Friday, amid expectations for an increase to 59.9 from a reading of 59.7 in March. The index, which measures the combined output of both the manufacturing and service sectors, is seen as a good guide to overall economic health.
In addition, this week's initial jobless claims data could extend the pre-pandemic low seen in the prior week.
John Kilduff, founding partner at New York energy hedge fund Again Capital, said there were two sides to the oil story, with the US side favoring the bulls.
Said Kilduff:
“There will be high expectations that the EIA will report another outsized crude draw this week. If the US economic numbers are good again, then we can expect crude prices to advance from last week’s levels. Otherwise, expect a correction or volatility.”
New York-traded West Texas Intermediate, the benchmark for US crude, edged lower in Monday’s trade, sliding 5 cents, or 0.1%, to 63.14 per barrel by 1:40 AM ET (0540 GMT). Last week, WTI rose 6.4% for its largest advance since the week ended Feb. 26.
London-traded Brent, the global benchmark for crude, dipped 7 cents, or 0.1%, to $66.70. Brent gained 6.7% last week, its most since the week ended Jan. 29.
Compared to US, COVID Recovery In India, Brazil And World Reversing
ANZ Research attributed the anemic start to the week’s oil prices to resurging COVID numbers which have reversed the recovery in the emerging countries such as India and Brazil.
India reported a record rise in coronavirus infections of 273,810 on Monday, increasing overall cases to just over 15 million, making the country the second-worst affected after the United States, which has reported more than 31 million infections. India's deaths from COVID-19 rose by a record 1,619 to nearly 180,000.
Hong Kong will, meanwhile, suspend flights from India, Pakistan and the Philippines from Apr. 20 due to imported coronavirus infections, authorities said in a statement late on Sunday.
Japanese companies believe the world's third-largest economy will experience a fourth round of coronavirus infections, with many bracing for a further blow to business, a Reuters monthly poll showed. Japan has had far fewer COVID-19 cases than many other major economies, but concerns about a new wave of infections are rising fast, according to their responses in the poll.
A slower rollout of vaccinations compared with other Group of Seven advanced countries and the lack of a sense of crisis among the public will trigger a new wave of infections, some companies wrote in the poll.
In the United States, energy companies added seven oil rigs last week as higher oil prices encouraged drillers to return to the well-pad.
Gold Longs Eye Return To $1,800 Pricing
On the precious metals front, gold bulls will likely face the debacle of whether the market will get to $1,800 an ounce this week and advance beyond that. Gold futures on COMEX and the spot price of bullion both hit 7-week highs above $1,780 on Friday.
While longs in gold are now banking on a return to $1,800, they are probably mindful that this wouldn’t be their first attempt since losing that pricing threshold in mid-February. The multiple failed attempts indicate potential volatility that could complicate gold’s steady advance and sustenance, even if it got to $1,800.
Sunil Kumar Dixit at SK Dixit Charting in Kolkata, India said:
“The bullish close on weekly charts asserts gold’s willingness to continue its move up to $1,800-$1,805 and even extend to $1,830.”
“That said, volatility at those highs could spark correction that pushes gold down to support areas of $1,755-$1,730, and again bring buyers seeking value.”
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.