By Barani Krishnan
Investing.com - It’s a month no oil trader could have imagined, not after OPEC’s plan for 2-million-barrels-per-day cuts, Iranian rockets fired at U.S. airbases and Saudi Energy Minister Abdulaziz bin Salman telling investors to go chew their thumbs for ignoring the Aramco (SE:2222) listing.
Yet, here it was: oil’s worst month in over a year, after a blockbuster 2019.
For the record, Brent posted a monthly loss of just over 14% for January, its biggest slide since November 2018, when it lost 22%. WTI fell nearly 16% on the month, its worst since May.
In just four weeks, the Coronavirus has undone what the Organization of the Petroleum Exporting Countries took more than a year to build. OPEC bore down on its most errant members - Iraq, Libya and Nigeria - to achieve compliance on cuts pledged over the past 18 months. The cartel stayed focused on its messaging, despite tweets by U.S. President Donald Trump aimed at disrupting the rising price of fuel at U.S. pumps in 2018, which Trump feared could cost Republicans votes in midyear elections (rival Democrats won the House anyway).
Yet, nothing OPEC had done over the past year and a half could have prepared it for the crisis at hand. The Coronavirus has practically sapped every ounce of confidence from the market and left in its place nothing but fear. It’s shaken the foundation of the bullish platform that took Brent to above $86 in October 2018 - its highest since the $100 per barrel days of 2013 - and again to a peak above $71 this year, after the volatility in recent months. Now, all traders can think of is how much lower can the market go, because the virus itself isn’t going away.
While the World Health Organization (WHO) has labeled the Coronavirus a global emergency, its global spread has still been relatively mild compared to China, where the pandemic is getting worse by the hour, both in infections and the death toll. To the oil market, the human casualty, city lockdowns and lost output in virtually every major industry in China means lost barrels that are mounting by the hour in the world’s largest consumer of the commodity.
And the losses are anyone’s guess, as estimates from Wall Street banks and research houses are starting to show.
Sanford C. Bernstein & Co. says oil could fall to around $50 a barrel without OPEC intervention. It has trimmed its gasoline demand forecast by 50,000 barrels a day, and cut its diesel consumption estimate by 40,000 barrels a day
Morgan Stanley says if the virus continues to escalate for three to four months, it would cut around 75,000 barrels a day from China’s 2020 oil demand growth. If the outbreak peaks in one to two months, first quarter demand growth would fall to 150,000 barrels a day from 310,000, it said.
Flight cancellations could cause the loss of 400,000 to 700,000 barrels a day of jet fuel demand in the first quarter, while diesel demand weakness could lead to refinery run cuts, Morgan Stanley said.
S&P Global Platts, in a worst-case scenario, says global oil demand will drop by a “massive and almost catastrophic” 2.6 million barrels a day in February and 2 million in March. For jet fuel, this could mean a 1 million barrel a day demand drop next month, it added.
Platts also reports that OPEC and its allies could hold a delegate-level technical committee meeting between Tuesday and Wednesday to recommend immediate action for the cartel’s ministers, who due to challenging schedules, may still meet be able to convene in March as scheduled. The technical meeting will potentially coordinate deeper production cuts in response to the Coronavirus crisis. Traders will be waiting to see what the meeting achieves though few may be convinced it will stanch the market’s bleeding.
And where does gold fit into all this?
Well, the yellow metal had its best month in five for January, acting as a hedge against the Coronavirus.
Charts indicate that at Friday’s settlement of $1,588 per ounce, both bullion and gold futures will be at a vantage point to try and build momentum again toward January’s seven-year highs above $1,600 an ounce.
Energy Review
Oil ended January with the worst monthly loss in more than a year as top buyer China remained virtually crippled by the Coronavirus crisis. Attempts by OPEC and its allies to expedite a meeting to prop the market barely helped.
Brent, the London-traded global benchmark for crude, settled down 71 cents, or 1.2%, at $56.52. Brent struck a four-month low of 56.16 in intraday trade.
New York-traded West Texas Intermediate, the benchmark for U.S. crude, settled down 58 cents, or 1.1%, at $51.56 per barrel. WTI hit a near six-month low of $51.11 earlier.
Friday’s losses came despite Russia’s new agency Ifax reporting that Energy Minister Alexander Novak was agreeable to the plan by Saudi Arabia and others in the OPEC+ group to bring forward to next month their scheduled meeting in March, in an attempt to put a floor under the market.
Bloomberg, in a separate report Thursday, said Moscow appeared resistant to expediting a meeting as it would mean deeper output cuts for those involved - something independent oil producers in Russia were against.
The Ifax report, however, suggested that the only problem for Moscow was agreeing with the rest of OPEC+ on a new date for the meeting.
Data showed China’s factory activity faltered in January, adding to fears about the fallout to the economy from the month-long epidemic.
Goldman Sachs revised down China's 2020 GDP growth expectations to 5.5% from 5.9%.
Global markets briefly calmed late on Thursday after the WHO gave China credit for its efforts in battling the epidemic. Yet, when trading resumed Friday, sentiment crashed again.
“Fear (is) creeping back in because despite that (WHO) proclamation that it should not interfere with travel and trade, the fact is, it already has,” Phil Flynn, senior energy analyst at the Price Futures Group in Chicago said. “The Coronavirus has spread from China to around 20 countries, killing more than 200 people.”
Energy Calendar Ahead
Monday, Feb 3
Genscape Cushing crude stockpile estimates (private data)
Wednesday, Feb 5
American Petroleum Institute weekly report on oil stockpiles.
Thursday, Feb 6
EIA weekly report on oil stockpiles
Friday, Feb 7
Baker Hughes weekly rig count.
Precious Metals Review
Gold posted its best monthly gain in five on Friday amid safe-haven buying in the yellow metal.
Gold futures for April delivery on New York’s COMEX settled the day down $1.30 at $1587.90. That didn’t stop the contract from posting a gain of more than 4% for January, the best performance for a benchmark gold contract since August.
But spot gold, which tracks live trades in bullion, was up strongly, rising $14.11, or nearly 1%, to $1,588.03 per ounce by 3:00 PM ET (20:00 GMT). That gave bullion a gain of nearly 5% for January, also the best performance in five months.
“This reflects the notion that the gold trade is one associated with loss-aversion,” TD Securities said in a note.