By Barani Krishnan
Investing.com - What a week. Oil cratered on a let’s-pump-till-we-drop vow by Saudi Arabia, before soaring on a let’s-fill-our-reserves-to-the-brim pledge by Donald Trump. Despite the president's intervention, crude lost 25% on the week, its biggest weekly drop since the financial crisis.
If that’s not enough, Wall Street went from bull market to bear; all of Italy went into lockdown - with Spain and France joining Saturday night; and the U.S. finally declared a state of emergency. In just five days, the entire kitchen sink got thrown at the oil market.
The longer take, of course, is that we are barely there in terms of the financial apocalypse that some of the most bearish pundits are predicting from the coronavirus. The path of least resistance for oil is lower, regardless what the Trump administration will buy to top up the U.S. Strategic Petroleum Reserve (SPR).
As Forbes energy contributor Scott Carpenter puts it, Trump’s SPR plan might prove “more effective as a metaphor for the shale sector’s bottomless appetite for debt”, rather than a meaningful catalyst for a crude price hike.
Reason? The SPR’s total capacity is 713.5 million barrels. As of last week, the total volume of crude in underground salt caverns of Louisiana, which account for the nation’s reserves, stood at just under 650 million barrels. That means the max that Trump can dump into those caverns is 63.5 million barrels. Even if the administration continues filling the SPR through the year-end, it will only be able to do up to 219,000 barrels per day over the remaining 290 days of the year beginning March 16.
“That is equivalent to not even half the size of the cuts which OPEC+ had been considering before recent talks fell apart. And it is only a fraction of the roughly 4 million barrels a day of oversupply that global markets might now face,” Carpenter says, referring to the aggressive Saudi production plan in coming weeks, that is expected to be matched somewhat by the Russians.
The looming oversupply in oil will come mostly from the worldwide clampdown on air travel, with carriers like American Airlines (NASDAQ:AAL) slashing as much as 75% of their international capacity after Trump’s ban on European travel. Consultant Rystad Energy sees global air traffic plunging 16% or more in 2020, resulting in a loss of around 780,000 bpd in jet fuel demand.
Yet, contrary to popular thinking, shale operators might not bleed to death yet from this week’s 25% plunge in crude prices, or the double-digit percentage loss in their shares.
While a barrel went as low as $30 on Friday - and could go even lower from April from Saudi-Russian production overdrive - Rystad says shale drillers were expected to save billions of dollars from record-high hedging gains in 2020.
Rystad’s analysis represents a peer group of 30 dedicated US light tight oil firms with combined output of about 38% of the total expected US oil production in 2020, excluding royalties.
“Looking at the hedging positions of the considered companies, we conclude that they hedged almost 50% of their guided 2020 output at an average price floor of $56 per barrel,” the consultancy said.
To put the savings into perspective, the hedging gains in a $35 WTI environment are equivalent to more than 25% of the peer group’s capex guidance of $45 billion for 2020, it added.
“The industry is well-positioned to mitigate the effects of an oil-price collapse in the short term thanks to the material cash flow support from derivative contracts,” concludes Artem Abramov, Rystad’s head of shale research.
If that’s the disconnect between cheap crude and profitable shale - which sounds almost oxymoron in itself - what could yield for gold?
Well, the saying that all that glitters isn’t your safe haven proved right for the latecomers to this week’s $1,700 gold party.
Immediately after topping at a seven-year high of $1,704.30 an ounce on Monday, gold futures began a decline that reached the pace of a plunging elevator shaft by Thursday.
COMEX futures lost some $188 between Monday’s peak and Friday's low as the announcement of the U.S. coronavirus emergency and fears of recession drove many to cash out their longs in the yellow metal to cover losses and margin calls in stocks and elsewhere.
The run for cash crushed those who had bought into gold after it began its descent from $1,700, on expectations that its safe-haven quality will resurface. Worse, for those who stay, $1,400 levels might be next, say analysts.
“Global markets are now driven by investors moving to cash or T-bills as they are not looking to hedge, diversify or for a safe haven,” said Ole Hansen, head of commodity strategy at Saxobank, said in a tweet.
“Crazy times indeed,” he added.
Yet, some believe gold will rebound in the coming week.
“Gold is still in the early stages of a major bull run,” said Ed Moya of online trading platform OANDA. “In this battle of king of the safe-haven trade, gold will have an easier time to the $2,000 an ounce level than the 10-year Treasury yield will have falling to zero.”
“The dollar is about to become a funding currency and gold should see tremendous upside as long as the Fed does not deliver a policy mistake,” Moya said, adding that next week will be key amid bets that the Federal Reserve will cut rates by a full point at its the conclusion of its Wednesday monthly meeting.
Energy Review
Oil settled up about 1% or more on Friday, ending up with its worst week since the financial crisis. But crude prices got a boost in post-settlement trade. Shares of shale drillers Diamondback Energy Inc (NASDAQ:FANG), Pioneer Natural Resources (NYSE:PXD) and Devon Energy (NYSE:DVN) also jumped about 10% each before Wall Street’s close, as Trump directed his Energy Secretary to top up national oil reserves.
WTI, or West Texas Intermediate, the New York-traded benchmark for U.S. crude, settled up 23 cents, or 0.7%, at $31.73 per barrel. For the week, WTI lost 25%, its most since December 2008, when the Great Recession was underway.
Brent, the London-traded global benchmark for crude, gained 63 cents, or 1.9%, to settle at $33.85. For the week, Brent also fell 25%, its most since the financial crisis.
Post-settlement, WTI showed gains as high as 6.1% and Brent 6.2% after Trump's directive to fill up the SPR.
Interestingly, the CME group, which operates the NYMEX exchange where WTI trades, commented on Friday that there was no certainty on how long the crisis in oil would drag given the resolve of Saudi Arabia to grab market share from Russia and U.S. crude exporters.
“The major oil powers of Russia, Saudi Arabia, and the US are now engaged in a test of their oil economics and energy dominance,” the CME said. “We will see who blinks first.”
Energy Calendar Ahead
Monday, March 16
Private Genscape data on Cushing oil inventory estimates
Tuesday, March 17
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, March 18
EIA weekly report on oil stockpiles
Thursday, March 19
Friday, March 20
Baker Hughes weekly rig count.
Precious Metals Review
The wind got sucked out of gold again on Friday as massive liquidation by investors desperate for cash left the yellow metal with near 5% loss, deepening the rut after the previous session’s drop of 3%. For the week, gold lost more than 9%, its most in nearly nine years.
Gold futures for April delivery on New York’s COMEX settled down $73.60, or 4.6%, at $1516.70 per ounce. For the week, the benchmark gold contract lost 9.3%, its most since the week ended Sept 18, 2011, when it fell 9.6%.
Spot gold, which tracks live trades in bullion, was down $58.19, or 3.7%, at $1,519.61 by 2:50 PM ET (18:50 GMT).
Just on Monday, April gold hit seven-year highs of $1,703.90. With Friday’s intraday low of $1,504.35, most analysts agree that gold futures could enter $1,400 territory by the start of next week.
Gold was also weakened on Friday by a wave of stimulus measures by the central banks of China, Australia, Indonesia, Sweden and Norway in an attempt to put a floor under financial markets. In the U.S., the Federal Reserve announced a $1.5 trillion liquidity injection, ahead of a full point rate cut widely expected next Wednesday.