Risk level: Orange
RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)
THE BOOSTER SHOT
- Russian influence growing, and not just at OPEC.
- Expect a volatile week in crude oil prices still searching for resistance.
The crimp on fuel demand and lower refinery runs stemming from the outbreak of the coronavirus continued to put pressure on crude oil prices last week. Before the spread of the 2019-nCoV, now dubbed the Wuhan coronavirus, the IMF had already lowered its global demand forecast and the virus is expected to put further downward pressure on Chinese GDP. To address slumping demand, a joint committee advising parties to the OPEC+ production agreement recommended additional cuts of some 600,000 barrels per day. Russia, however, has balked at the proposal, saying it needs more time to read the pulse of the market. That pulse is weak, though Moscow may be thinking about more than just the economy.
Demand destruction from the coronavirus and Russian reluctance helped push crude oil prices deeper into a bear market. US manufacturing, meanwhile, continued to show weakness, with dwindling hires the cloud over an otherwise strong labor reading. Brent finished the week at $54.47 per barrel, down some 2.5% from last Monday and in line with the Orange alert issued for the week ending Feb. 7.
“Russia needs a few days for market analysis,” Russian Energy Minister Alexander Novak said last week.
Figures on the expected demand destruction from the coronavirus run the gamut from 400,000 bpd to as much as 1 million bpd. If OPEC keeps pumping oil as it’s been, there would be a 600,000 bpd glut in the first quarter and a 1 million bpd glut in the second, according to estimates last week. Novak, however, estimated demand would only contract by about 200,000 bpd at most. His caution was amplified by concerns over a volatile market where a Libya under blockade is skewing the numbers. S&P Global Platts last week estimated that OPEC+ production curtailment pulled 470,000 bpd from the market, though most of that was because of involuntary cuts from Libya. Should Libya return, the market would be tilted further toward the supply side.
Elsewhere, Novak said US production was slowing and it is there where we can see more of Moscow’s intent. Fiscal policies put forward last year by Russian President Vladimir Putin put the break-even price for Urals crude at around $49 per barrel, giving the Kremlin a slight edge in the current market climate. Mark Papa, the head of oilfield services company Schlumberger, told Reuters that US shale producers need oil at around $55 per barrel to make money. At about $50 per barrel of WTI, both producers are turning a profit. Meanwhile, Saudi Arabia, the de facto leader of OPEC, is seeking a much higher price point in order to prop of shares of Saudi Aramco. If Russia concedes, the higher oil prices that followed would be a victory of sorts for a US president eager to capitalize on stock market gains and strong employment in the run up to November elections. Riyadh, meanwhile, would get rich on Aramco profits while at the same time decoupling its economy from oil. Holding the reins among parties to the OPEC+ group, therefore, is something of a strategic coup for the Kremlin.
In the geopolitical arena, the Kremlin continues to lay foundations at influential points across the global economy. Putin likely sees an opportunity to fill a void in the Middle East left by fluid commitments from Washington and expand the Russian sphere beyond its traditional belt of influence. Russia, more so than the United States, is playing power broker in Syria and Iraq, which may even be considering Russian air defense systems. Russia is also influential in the pursuit of Libyan peace. In the Western Hemisphere, it is Russia that continues to support the government of Nicolas Maduro, and the Venezuelan oil sector by proxy. In Mexico, Russian Foreign Minister Sergei Lavrov expressed an interest for deeper investments, a few short days after the Trump administration rebooted the North American Free Trade Agreement. With Trump’s America looking to address the management fatigue that set in after some 75 years of hegemony, the Kremlin sees no vitality left in the doctrines that enshrined American leadership, Lavrov said from Mexico.
“We have agreed that any attempts to resuscitate neo-colonial doctrines like the Monroe Doctrine and to repeat scenarios of infamous color revolutions may lead to a dangerous escalation,” he said.
A coup indeed.
It is a trifecta week in the oil market, with OPEC, the IEA and EIA all publishing their monthly reports. Pay attention to the new budget from the Trump administration that’s expected to be soft on foreign assistance and hard on defense spending. Tuesday brings a look at GDP in a Great Britain formally out of the European Union. The market wonks will want to pay attention on Tuesday when US Fed Chair Jerome Powell speaks before a House finance panel. We’ll see Wednesday if the glut continues in the United States when the EIA releases its weekly data on crude oil and fuel inventories. On Thursday, watch the data on US consumer prices. Vocally, consumers feel good, but spending habits may be another story. Advance retail sales data for the United States and GDP figures for the EU round out the week.
Weaker demand in China is already weighing on crude oil prices to start the week. Brent may have some room left before it hits a support level, but expect a hard bounce should OPEC act or GDP surprise on the upside. Another Orange alert is in place, with crude oil prices expected to move by at least +/- 3% on the week.