By Peter Nurse
Investing.com - Oil markets traded in a mixed fashion Monday, with U.S. futures outperforming after the Federal Reserve announced aggressive new steps to cushion the hit to the economy from the coronavirus pandemic.
AT 08:55 AM ET (1255 GMT), U.S. crude futures traded 2.3% higher at $23.14 a barrel, while the international benchmark Brent contract dropped 2.4% to $26.34.
Markets turned up after the Federal Reserve announced a massive second wave of initiatives to support the American economy, backstopping an unprecedented range of credit for households, small businesses and major employers, as well as announcing unlimited further purchases of Treasury and agency debt.
The Fed will support “the flow of credit to employers, consumers and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing,” through a facility leveraged on a $30 billion equity injection from the Treasury.
This helped prop up an oil market which had been hit hard by the failure of U.S. policymakers Sunday to agree on the terms of a funding package of more than $1 trillion, resulting in it not getting enough votes in a key Senate procedural vote.
That said, it’s debatable how long these gains will last given the U.S. unemployment rate could hit 30% in the coming months, as per St. Louis Fed President James Bullard's comments to Bloomberg on Sunday. That would be worse than during the Great Depression.
"We believe that prices will continue the slump, as we estimate that supply will surpass demand by more than 10 million bbls next quarter and storage infrastructure will be insufficient to support the current production level,” according to Rystad Energy.
Gasoline RBOB Futures ignored the macro news to focus on the reality of the near-term glut. They fell 9.5% to $58.74c a gallon.
There was hope on Friday that the issue of global supply would be addressed with OPEC Secretary General Mohammad Barkindo inviting Texas Railroad Commissioner Ryan Sitton to the organisation’s summer meeting in June.
And Sitton did call for decreased production of Texan crude output for the first time since 1970.
However, “given the continued pressure on demand, it does appear that any action taken by OPEC+, along with even potential US supply limits, would not be enough to bring the market to balance,”said analysts at ING, in a research note. “Instead it would only reduce the scale of the surplus over 2Q20, potentially providing a floor for the market rather than significant upside.
“However for now, and with any deal some distance away, we continue to believe that there is further downside to oil prices as we move into 2Q20,” ING added.