By Barani Krishnan
Investing.com - From Russia “will not blink” in its game of chicken with Saudi Arabia, to Texas getting a seat at the next OPEC meeting, the week’s drama in oil ranged from a battle of wits to the unthinkable as U.S. crude prices finished with their worst weekly loss in three decades.
And for a quick peek ahead, no matter what Donald Trump, Vladimir Putin or Mohammad bin Salman say, oil’s fundamentals aren’t going to get terribly brighter soon. Not with the Covid-19 locking hundreds of millions of people in their homes and preventing them from driving, flying or doing the regular things they do to get the oil in the tanks moving and refilled.
And in case you think gold’s fundamentals are way better, think again. This week, the safe-haven hit an eight-month low of just above $1,450 an ounce, after the previous week’s more-than-9%-drop, which was its worst in 37 years. Sure, the yellow metal could see better times in the week ahead. But again, there's no certainty that it will - not when everyone hurting on Wall Street is selling all the gold they can to cover margins and losses.
As our contributor Chris Vermeulen wrote on Friday, “Cash Is King, Not Gold, Not Bonds”. Underscoring this, the Dollar Index ended the week up nearly 5%.
Now, back to oil: $20 per barrel had been written on crude's wall since Goldman Sachs’ forecast on March 8, and almost everyone could feel its imminence. That it would come with a 24% crash in a day that would be the worst for oil since 1991 wasn’t something everyone expected though. Neither was the 24% rebound in the very next session that marked a complete reversal of the first day’s losses in percentage terms, though not exactly in the dollar sense.
The trigger for oil’s 24% capitulation wasn’t a single event but rather a series of catalysts pointing to a looming recession - including a caution by Treasury Secretary Steve Mnuchin on Wednesday that U.S. unemployment could hit 20% if the administration did nothing about it.
By Thursday, however, Mnuchin had walked back his warning on the unemployment - originally delivered behind closed doors to Republican Senators - saying it had been taken out of context. The treasury secretary pointed to proposed stimulus of some $1.3 trillion as one reason why the economy wouldn’t fail so spectacularly.
Adding to Mnuchin’s reassurance were three oil-market interventions linked to the administration. The first was President Trump’s order committing the administration to buy 77 million barrels of U.S. crude to top up the nation’s Strategic Petroleum Reserve. The second was a Wall Street Journal report that the United States will make a diplomatic push to get the Saudis to bring their oil production down again to levels before the start of their price war with the Russians. The third - based on the same report and on the premise that the Saudis might not comply - was to put sanctions on Russia, so that the Kremlin will do the cuts instead. U.S. crude jumped 24% on Thursday, it’s most ever in a day, responding to all these.
Yet, as the saying goes, it isn’t over till it’s over, and the week certainly wasn’t over for oil despite that record rebound. By Friday, the market was buffeted again, starting with a Bloomberg report that Russian President Putin won’t bow to what’s seen as a Saudi oil-price blackmail. Then, just before Wall Street opened, came data showing weekly U.S. jobless claims had jumped by 70,000 to a two-year high of 281,000. Goldman Sachs then warned of a possible historic surge in layoffs, reviving fears over what Mnuchin said.
The Covid-19, meanwhile, was raging like wildfire across the United States, with California’s 40 million people on total lockdown and New York’s 20 million mostly shuttered at home too.
But Friday’s news wasn’t entirely negative for oil. Also in the mix was another Journal report, published late on Thursday, that the Texas Railroad Commission, which regulates crude output in the largest U.S. oil producing state, was considering restrictions last enforced in the 1970s to put a floor under the market. TRC member Ryan Sitton, who’s behind that initiative, even tweeted on Friday that he had spoken with OPEC Secretary-General Mohammed Barkindo over the phone and been invited to the cartel’s upcoming meeting in June - a development unimaginable just a few years ago.
Yet, TRC Chairman Wayne Christian poured cold water on Sitton’s plan later on Friday, saying he had "reservations" about doing any production cuts in Texas.
If those mixed signals weren’t enough, Reuters also reported on Friday that the Trump administration plans to send a special energy envoy to Saudi Arabia to work with the kingdom on stabilizing the global oil market. The emissary would particularly be counting on Trump’s cozy relationship with Saudi Crown Prince Mohammad bin Salman to get the job done.
The coming week isn't expected to be any calmer. Be prepared for more price swings as the coronavirus grows at a clip of 2,000 new cases in the United States a day and more lockdowns loom in U.S. states - even as authorities race to contain the outbreak and lawmakers embark on an even larger $2 trillion rescue plan.
Energy Review
West Texas Intermediate, the New York-traded benchmark for U.S. crude prices, settled down $3.28, or nearly 13%, at $22.63 per barrel.
Just a day ago, WTI jumped 24%, reversing all of what it lost Wednesday. For the week, the U.S. crude benchmark was down 29%, following through with the previous week’s 23% slide.
Brent, the London-traded global benchmark for crude, settled Friday’s trade down $1.49, or 5.2%, at $26.98. For the week, Brent fell 20%, after the previous week’s 25% drop.
The epic losses in oil come amid a perfect storm of demand destruction caused by the Covid-19 pandemic and a production hikes-and-markets-share tussle between Saudi Arabia and Russia.
In Friday’s session, WTI initially fell more than 7% on a Bloomberg report that Russia “will not blink” in its face-off with Riyadh.
By early afternoon in New York, WTI also pared losses after industry firm {{0|Baker Hughes}} reported that rigs actively drilling for oil in the United States had fallen by 19 this week to 664. While a lagging indicator, the weekly oil rig count is one of the most trusted predictors of U.S. crude production.
Energy Calendar Ahead
Monday, March 23
Private Genscape data on Cushing oil inventory estimates
Tuesday, March 24
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, March 25
EIA weekly report on oil stockpiles
Thursday, March 26
Friday, March 27
Baker Hughes weekly rig count.
Precious Metals Review
Gold became an unintended victim of the Trump administration’s failed attempts to calm Wall Street, falling under the $1,500 level as investors liquidated to raise cash as the Dow fell beneath the key 20,000 point level.
Gold futures for April delivery on New York’s COMEX settled down by a modest 5.4, or 0.4%, on Friday at $1,484 per ounce. For the week though, gold futures lost more, sliding 2.2% to add to the previous week’s 9.3% slump, which was the worst since 1983.
Spot gold, which tracks live trades in bullion, last traded on Friday at $1,499.07, up $26.14, or 1.8%. For the week, bullion lost 2.1%.
While gold saw limited volatility during the week, it still hit a July low of $1,450.90 on Monday.
“Gold is really caught between a rock and a hard place and that’s depreciating its safe-haven label,” said Tariq Zahir, founder of New York-based Tyche Capital Advisors, which runs a Global Macro Commodities Program.
“For now, all eyes are on the Dow and taking is it on the chin, though for some that also means a buying opportunity to get in at below $1,500.”