27 March 2020

Crude Oil Sinks After Three Session Gains

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What’s happening: Oil prices closed lower on Thursday, as worries escalated over a decline in energy demand due to the global spread of coronavirus.

What happened: After rising for three consecutive sessions, crude oil moved lower on Thursday, declining around 8%. Investor sentiment was hurt by the US Department of Energy’s announcement of suspending its plans to purchase crude for the country’s SPR (Strategic Petroleum Reserve). There are still some hopes, however, of the Trump administration being able to get clearance for the plans.

Why it matters: The US Department of Energy had announced plans to buy crude oil for its emergency stockpile on March 19. The plans involved purchasing up to 30 million barrels of oil for the SPR. The requested funding of $3 billion was not included in the $2 trillion stimulus package passed by the White House and Senate on Wednesday. The House is likely to vote on the bill later today.

After passing the stimulus package, Senate Minority Leader Chuck Schumer had said that the $3 billion funding for crude stockpiles had been eliminated in the revised version of the bill. The Department of Energy still believes that some kind of deal is possible, as small and medium-sized American energy companies are struggling due to the steep fall in energy prices and has requested the Congress work with the Trump administration to provide the funding soon.

Meanwhile, energy companies have announced various measures to remain afloat, including dividend cuts, spending reductions and layoffs. The energy sector is the worst hit in the S&P 500 this year, plunging around 50% since January.

The WTI crude contract for May plummeted 7.7% to settle at $22.60 a barrel on Thursday, while the Brent crude contract for May fell 3.8% to $26.34 a barrel. WTI oil had risen 1.1% to $22.84 per barrel at 9:00am GMT.

Oil prices have posted massive declines due to contraction in global energy demand following the COVID-19 outbreak. The price war between Saudi Arabia and Russia exerted further pressure on prices as oil producing majors are gearing up to increase supply

Some support was provided by the US Energy Information Administration’s report showing a decline of 29 billion cubic feet in domestic supplies of natural gas for the week ended March 20. April heating oil is down 4.3% to $1.0503 a gallon, while natural gas for April has slipped 1.3% to $1.637 per million British thermal units.

Why it matters: The current deal between the OPEC (Organisation of the Petroleum Exporting Countries) and its allies is expiring on March 31. An aggressive price war between Saudi Arabia and Russia could flood the already oversupplied market. On the other hand, the International Energy Agency’s Executive Director Fatih Birol has projected oil demand to decline by as much as 20 million barrels per day, with around 3 billion people under a lockdown globally

What to watch: Investors will be looking out for any news related to the US decision around funding for its energy companies. Investors are still hopeful of a settlement between the OPEC+ nations to end the price war. The market also awaits the US Baker Hughes crude oil rig-count report.

The Markets Today

     

Investors will be watching European stocks today, with major indices closing higher for the third consecutive session on Thursday.

Context: European stocks pared all losses to close higher on Thursday, following a sharp rise on Wall Street the previous day. Italy and Spain are among the hardest hit countries from COVID-19 and investors await a virtual summit of EU leaders on emergency funds to minimise the economic impact of the pandemic.

Details: US jobless claims surged to a record 3.28 million last week, but investors ignored this surprisingly negative news and focused instead on the US Senate’s approval of a $2 trillion coronavirus relief package. Any improvement in the US economy will have a ripple effect in Europe. Moreover, the US relief package being passed ignited hopes of the EU following suit.

After falling to 2% earlier in the session, the pan-European STOXX 600 index reversed course to end 2.6% higher. The index has added around 15% over the previous three sessions, but is still down 26% from its record high in February. The FTSE 100 surged 2.2%, while the German 30 rose 1.3% on Thursday.

The coronavirus pandemic is showing no signs of containment, despite some tough measures being adopted by the European nations. There has been a continuous rise in cases and deaths across Europe, with the case-count exceeding 80,500 in Italy and 57,700 in Spain. Italy has also reported the highest number of deaths from COVID-19 in the world, with its death toll reaching 8,200.

Investors are now looking at various governments to save the day. Hopes were also kindled by the Bank of England suggesting additional asset purchases while announcing to keep interest rates unchanged at its latest meeting.

What to watch: European leaders continue to debate on a strategy to control the economic fallout from the pandemic. Any news on an agreement and a stimulus package will lift investor sentiment. Markets also await some key economic reports from the region, including France’s consumer confidence and Italy’s consumer and business confidence data.

Consumer confidence in France is projected to decline to 92 in March, from February’s reading of 104. Italy’s consumer confidence is projected at 100.5 in March, down from the previous reading of 111.4. The country’s business confidence index is also likely to drop to 90 in March, from a reading of 100.6 in February. The UK’s House Price Index, which rose 2.3% in February, is expected to expand 2.1% in March.

Other Markets: US indices closed sharply higher on Thursday, with the Dow, S&P 500 and Nasdaq 100 up 6.38%, 6.24% and 5.60%, respectively.

Support & Resistances
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Futures at 0400 (GMT)

News shaping
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What else to watch today

     

Turkey’s economic confidence index, Russia’s corporate profits and business confidence, Saudi Arabia’s bank lending growth, UK’s car production, India’s deposit growth, foreign exchange reserves and bank loan growth, Mexico’s balance of trade, Brazil’s loan growth and net payrolls, Canada’s average weekly earnings and government budget value as well as the US personal spending, income and University of Michigan's consumer sentiment index.

 

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