By Barani Krishnan
Investing.com - U.S. crude is within striking distance of $30 a barrel. At its present trajectory, it’ll get there, we can agree. But how high into the $30s will WTI reach in the coming week? Will it stay there? These are the questions the trade needs answers to.
But before that, there’s another development over the next 48 hours the market will be keenly watching: the pending expiry of the June front-month contract of the West Texas Intermediate.
We all know what happened a month ago when WTI’s previous front-month, May, expired. Beyond anything anyone could have imagined in their lifetime of trading U.S. crude, the May contract fell headlong into the abyss of sub-zero. The coronavirus pandemic had almost totally eclipsed any demand for oil by Friday, April 18, and physical crude prices opened Monday, the 20th, in the negative while futures were still trading in the positive. Anyone trading crude knows the two markets have to converge, and those holding May futures were still hoping to exit with the shirts on their backs. There would be no such grace. By the close of April 20, the futures contract was $37 in the negative. Those stuck with the worthless thing called May WTI paid whatever they could to get out of it, as the alternative of taking delivery, storing and selling the oil at a later date seemed even costlier and more laborious. And there was still another day to go for expiry.
A sequel to that horror had been widely expected for June WTI. But the current front-month appears almost certain to avoid such a fate after a miraculous 192% rebound from the April 28 low of $10.07. Whether it gathers more momentum - or at least stays the course - will be what the market’s watching in the coming week.
Demand for gasoline in the United States has been impressive for the last two weeks and fear that storage tanks in the country will run out of space to store oil - one of the catalysts for May WTI’s meltdown - seems a little misplaced for now. But demand for diesel is still anemic. Even with all of America’s 50 states having reopened for business in one way or another, people continue working remotely, causing buses and trains to run on lighter schedules that require far less diesel consumption than four months ago. The most important thing is the physical price of crude, as tracked by the Plains All American Pipeline network, was at $26 per barrel as of May 15, less than $4 short of the June futures contract. That’s comforting for anyone worried about convergence between the two, in order to keep things in the positive.
As for precious metals, gold has had a break out too, finally shattering the $1,750 ceiling that had kept the yellow metal from advancing toward the $1,800 mark long craved by both gold bugs and the safe haven crowd.
Spot gold will be closely watched, especially after its hit on 7-½ year highs Friday.
Energy Review
President Donald Trump might very be disappointed with China these days, but it was Chinese data on Friday that helped accelerate U.S. crude oil’s run toward $30 per barrel.
West Texas Intermediate, the New York-traded benchmark for U.S. crude, settled up $1.87, or 6.8%, at $29.43 per barrel after data showed China's industrial production rose 3.9% in April from a year ago, improving from a 1.1% fall in March.
Brent, the London-traded global benchmark for oil, rose $1.37, or 4.4%, to settle at $32.50.
WTI has been on a tear since hitting a bottom of $12.34 on April 28, rallying almost 140% in just over two weeks. The U.S. crude benchmark remains down 50% on the year. But Friday’s two-month high of $29.91 in WTI brought its discount versus Brent, typically at $5 per barrel, to under $3 at one point, powerfully altering the dynamics between the two benchmarks.
For the week, WTI gained 19%, extending last week’s 25% jump and the previous week’s 17% rise.
Brent saw a relatively modest climb of 5% on the week. Its gains over the past two weeks were virtually a reverse of WTI’s - 17% last week and 23% the previous week.
Much of the boom in U.S. crude of late has been due to cratering domestic production, as the coronavirus pandemic shut down wells and oil rigs across the United States at a faster rate than elsewhere in the world. Rising gasoline production has also helped, as most of the 50 U.S. states have reopened from lockdowns imposed over the Covid-19.
But Friday’s run toward $30 WTI - an important psychological mark for oil bulls —- came on the back of China’s resurgent industrial production data underscoring recovery in factory activity in the world’s largest oil importing country.
It also comes a day after Trump said he was very disappointed with China's failure to contain the outbreak of the virus, and that he might even cut ties with the world's second largest economy.
“WTI crude neared a two-month high as China’s industrial output rose for the first time since the coronavirus pandemic, fueling hope that crude demand will soon improve in Europe and then the U.S.” Ed Moya, analyst at New York’s OANDA said. “China remains the template for the economic recovery for the rest of the world and (it) gave energy traders some hope that demand will begin to recover over the coming weeks.”
$30 WTI will also be a personal victory for Trump who lobbied OPEC, Russia and other world oil producers in April to slash production and has gotten behind the U.S. energy industry to ensure its survival amid the pandemic.
Energy Calendar Ahead
Monday, May 18
Private Genscape data on Cushing oil inventory estimates
Tuesday, May 19
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, May 20
EIA weekly report on oil stockpiles
Thursday, May 21
Friday, May 22
Baker Hughes weekly rig count.
Precious Metals Markets Review
The spot price of gold pierced the key $1,750-per-ounce mark on Friday, hitting 7-½ year highs, while U.S. gold futures rose to a one-month peak after more dismal data on U.S. retail sales and industrial production.
“Gold continues to rise as grim milestones are reached with U.S. economic data,” said Ed Moya, analyst at New York-based online trading platform OANDA.
“U.S. data for the month of April was disastrous, adding to fears of permanent damage to the economy. Along with escalating tensions between the U.S. and China, (these) should continue to support higher gold prices.”
Spot gold, which tracks trades in bullion, settled up $12.56, or 0.7%, at $1,743.02. It earlier surged to $1,752.13, its highest since December 2012.
U.S. gold futures for June settled up $12.25, or 0.7%, at $1,753.15. It scaled $1,760.55 at the session highs, marking peak since April 14.
Data issued on Friday showed U.S. retail sales falling 16.4% and industrial production 11.4% in April, marking the worst monthly performance ever for the two gauges, as the Covid-19 pandemic virtually crippled the U.S. economy.
The U.S. economy shrank 4.8 percent in the first three months of 2020 for the sharpest economic decline since the Great Recession of 2008/09. While nearly all 50 states in America have reopened their economies in one way or another over the past two weeks, economists warn of a sharp recession by the second quarter, meaning more bleak data to come.
White House Economic Adviser Larry Kudlow said on Friday the U.S. economy was still in a freefall mode despite most states in the country having reopened from lockdowns imposed over the Covid-19.
“We haven’t turned the corner yet on unemployment claims,” Kudlow told a Fox Business interview. “I was looking through the continuing claims and they look a little lighter or lower than people might have thought. But they've been in a pretty steady downtrend for the past six or seven weeks and they're still bad numbers and they're still heartbreak numbers, hardship numbers.”
“The pandemic’s contraction and Q2 is going to be very difficult,” he added, referring to the 36 million jobs lost over the past two months.
Gold also got a shot in the arm from worsening U.S.-China relations.
In a separate interview with Fox Business broadcast on Thursday, President Donald Trump said he was very disappointed with China's failure to contain the disease and that the pandemic had cast a pall over his January trade deal with Beijing, which he has previously hailed as a major achievement.
Trump, who seeks reelection in November and has been sharply criticized for his own handling of the pandemic, said he has no interest in speaking to his Chinese counterpart Xi Jinping to fix ties, suggesting that he might even sever relations with the world's second largest economy.
* Disclaimer: Barani Krishnan does not own or hold a position in the commodities or securities he writes about.