By Barani Krishnan
Investing.com - Has OPEC pulled it off? The days and weeks ahead will tell.
In what could be regarded as the oil market’s equivalent of skiing of a cliff, the Organization of the Petroleum Exporting Countries audaciously took the plunge this week in rolling back production cuts at a time when demand for fuel could be suspect at best — just as the United States experiences a dramatic new high in Covid-19 cases.
“OPEC+ is anxious to see higher crude prices as soon as possible but its ambition is likely to be thwarted in the short term by the renewed softness in fuel consumption,” Reuters oil analyst John Kemp said in a post on Friday.
Kemp said fuel traders and refiners were becoming more pessimistic about the outlook for the global economy and transportation for the rest of this year, even as the crude producers in OPEC+ try to push oil prices higher.
“Price premiums for gasoline and diesel over crude have been flat or falling for almost four weeks since June 23 amid growing anxiety about a resurgence in the coronavirus and a new round of lockdowns,” he added.
The run-up in crude prices has stalled since OPEC announced Thursday that it would roll back from next month 20% of production cuts it had maintained since the start of May. For granularity, that meant that the Saudi-led and Russia-assisted OPEC+ alliance will withhold 7.7 million barrels a day from the market from August onwards, compared with the 9.6 million in July.
Even before the latest bout of weakness, U.S. refiners have been forced to restrain crude processing to allow excess fuel inventories inherited from the lockdown to be absorbed.
U.S. gasoline consumption has been broadly flat for the last three weeks as the emergence from lockdown has run into a new wave of coronavirus cases.
Gasoline margins have been trending lower since June 23, after rebounding strongly over the previous three months as the major economies emerged from lockdown.
Diesel margins have been steadier throughout the pandemic, but the modest uptrend has fizzled out in recent weeks.
Earlier expectations of a quick and complete V-shaped recovery are giving way to fears about an extended period of below-trend output and employment.
Kemp said renewed weakness in gasoline and diesel prices was signaling to refiners that they may need to trim processing rates to avoid a new build up in stocks.
“Refiners are trapped between OPEC+, which wants to drain excess crude inventories as quickly as possible and drive oil prices higher, and sluggish consumption of gasoline and diesel,” he added.
On the precious metals front, gold coasted to a sixth straight winning week on Friday as a new spike in the coronavirus, uncertainty for the global economy and prospects of a Joe Biden victory in U.S. presidential elections continued to investors toward the safe-haven.
The United States shattered its daily record for coronavirus infections on Friday, prompting some states to impose partial lockdowns, while the number of global cases reached almost 14 million.
“Gold prices are steadily rising as investors start to raise their stimulus expectations on coronavirus second wave fears,” said Ed Moya, senior markets strategist at New York-based OANDA.
The Covid-19 aside, election risk was also factoring in for U.S.-based investors in gold as polls increasingly show former vice-president Joe Biden leading President Donald Trump in the run-up to November 3 presidential run-off, said Moya.
“Wall Street can’t ignore the polls anymore and (has) start(ed) to price in the risk of a Biden Presidency,” he added.
Energy Markets Review
Oil prices remained down in a late-week swoon on Friday that broke with two straight weeks of strong gains, as investors reacted pessimistically to news that OPEC will be rolling back on production cuts.
New York-traded West Texas Intermediate, the benchmark for U.S. crude futures, settled down 16 cents, or 0.4%, on Friday at $40.59 per barrel.
London-traded Brent, the global benchmark for oil, fell 24 cents, or 0.6%, to $43.13.
For the week, WTI ended virtually flat while Brent showed a loss of nearly 0.3%.
Investors are assessing whether “a steady string of downbeat crude demand headlines will persist over the coming weeks”, said Ed Moya of New York-based OANDA, an online trading platform. “Fuel consumption is not rebounding strongly.”
Surges in coronavirus infections are slowing a recovery in fuel use and raising concern that it could be years before consumption rebounds from the impact of the pandemic.
The United States reported at least 75,000 new COVID-19 cases on Thursday, a daily record. Spain and Australia reported their steepest daily jumps in more than two months, while cases continued to soar in India and Brazil.
Energy Calendar Ahead
Monday, July 20
Private estimates on Cushing oil inventories from Genscape.
Tuesday, July 21
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, July 22
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, July 23
EIA weekly report on natural gas storage
Friday, July 24
Baker Hughes weekly survey on U.S. oil rigs
Precious Metals Markets Review
U.S. gold futures for August delivery on Comex settled up $11.8, or 0.66%, at $1,812.10 per ounce on Friday.
Spot gold, the real-time indicator of bullion prices, rose by $13.39, or 0.8%, to $1,810.56.
For the week, Comex gold rose 0.1% while bullion gained 0.6%.
Gold prices have gained roughly $130 an ounce, or 8%, since the week ended May 31, rallying back-to-back for six weeks now.
A sharp rise in stimulus packages globally to shield economies from the fallout of the coronavirus pandemic has driven safe-haven gold prices 19.3% higher so far this year.
U.S. lawmakers return to Washington on Monday to discuss potential new coronavirus aid programs, while investors also eyed a meeting of EU leaders in Brussels about a proposed stimulus to kick-start their COVID-hit economies.