13 May 2020

Crude Oil Burns Brighter on Additional Output Cuts

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What’s happening: US crude oil futures surged to a five-week high on Tuesday, as sentiment was lifted by declining production and some rebound in demand.

What happened: With various economies around the world beginning to ease lockdown restrictions imposed to curb the COVID-19 pandemic, demand for crude oil is gradually reviving.

The OPEC+ (Organization of Petroleum Exporting Countries and its allies) had agreed in April to cumulatively reduce oil production by 9.7 million barrels per day from May through June, making this the biggest output cut in its history. OPEC's de-facto leader, Saudi Arabia, announced plans on Tuesday to lower its crude oil production by an additional 1 million barrels per day in June.

Market sentiment was also lifted by speculations of the agreed production cuts to extend beyond June.

Why it matters: Saudi Arabia has directed its national oil company Aramco to make additional output cuts in June, taking production to 7.492 million barrels of oil per day.

Other members including, Kuwait and the UAE, supported Saudi Arabia’s move and announced plans to cut production by 80,000 and 100,000 barrels a day, respectively, from June.

The OPEC+ group had agreed last month to lower production in a bid to stabilise oil prices and the commodity market. The group had intended to return to normal production post June, but with economies making a slower recovery than anticipated, the member countries could continue at the lower production level even after next month.

WTI (West Texas Intermediate) crude for June delivery gained 6.8% to settle at $25.78 per barrel on the NYMEX (New York Mercantile Exchange). Global benchmark Brent crude for July gained 1.2% to reach $29.98 a barrel.

The US EIA (Energy Information Administration) reduced its outlook for domestic oil output to 11.7 million barrels per day for 2020, down 500,0s00 barrels per day versus 2019.

Although the API (American Petroleum Institute) announced late Tuesday that US crude stockpiles had risen by 7.6 million barrels in the week ended May 8, China’s crude inventories have declined in the latest weeks after surging to record highs.

June natural gas fell 5.8% to $1.72 per million British thermal units, ahead of the EIA’s next report on Thursday. June gasoline declined by 0.6% to settle at 91.85 cents a gallon.

What to watch: Oil traders will be keeping a close eye on any signs of a recovery in economic activity across the globe, which will push demand higher for the commodity. Markets also await EIA’s weekly report on US crude inventories, which is expected to rise 4.8 million barrels in the week ended May 8. Gasoline supplies are projected to fall 2.5 million barrels, while distillates are likely to have risen by 4.1 million barrels last week.

The Markets Today

     

UK markets will be in focus today, ahead of various economic reports from the country scheduled for release later in the day.

Context: UK stocks closed higher on Tuesday, as investors cheered news of Chancellor Rishi Sunak extending the employee furlough scheme by four months.

Details: Chancellor Rishi Sunak reported on Tuesday that the Coronavirus Job Retention Scheme, which aims to prevent forced job losses amid the current crisis, has been extended until October end. “We are doing everything we can to protect those who are unable to work,” the minister said.

Meanwhile Ryanair announced plans to restore 40% of its flights starting July 1. stocks Shares of Land Securities dropped 12% after the British property developer disclosed massive losses.

London’s FTSE 100 closed higher by 0.93% on Tuesday, driven by gains from telecommunications and food retailers.

Elsewhere, China reported a 3.1% decline in its producer price index for April, versus expectations of a 2.6% decline.

What to watch: Investors will be keeping an eye on daily coronavirus numbers, with total cases exceeding 4,259,250 globally. The UK has confirmed more than 227,740 COVID-19 cases with 32,760 deaths.

Investors await a basket of economic reports from the UK, including balance of trade, GDP growth rate, business investment, manufacturing production, construction output, industrial production, goods trade balance and construction new orders. The country’s gross domestic product, which remained flat in the fourth quarter, is expected to contract by 2.5% in the first quarter. Business investment is expected to decline 2.5% in the first quarter, while manufacturing production is projected to tumble 10.4% in March. Industrial production, which rose 0.1 in February, is likely to decline 5.6% in March.

Other Markets: US indices closed lower on Tuesday, with the Dow, S&P 500 and Nasdaq 100 down by 1.89%, 2.05% and 2.06%, respectively.

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What else to watch today

     

Turkey’s current account, Brazil’s retail sales, Eurozone’s industrial production, Russia’s total vehicle sales and foreign exchange reserves as well as the US MBA mortgage applications and producer prices.

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