-Central banks may run out of tools
-OPEC+ in desperate need of a Goldilocks policy
It was déjà vu all over again in early Wednesday trading, with Brent rallying on the back of stimulus in the form of Saudi support for deeper production cuts to stem the glut left by demand destruction. The coronavirus knows no quarter so far, with the outbreak spreading deeper into the eurozone. In China, cases may be slowing, but there’s a latent effect playing out in the regional economy. Markets rallied early Tuesday in a fit of optimism, but cooled off in a spasm of not-good-enoughs. There is a real risk of a repeat of that in trading today.
Brent crude oil was priced at $52.70 per barrel as of 8 a.m. ET, up 1.62% from the previous close. The global benchmark rallied in similar fashion on Tuesday, but sputtered on expectations of a build in US crude oil inventories and a lackluster reaction to an emergency rate cut by the US Federal Reserve.
Saudi Arabia on Wednesday was pushing again for a 1 million barrel per day cut in production from parties to the OPEC+ restraint group. That’s nearly twice as much as the curtailment recommended by the Joint Ministerial Monitoring Committee at the onset of the coronavirus fears. OPEC economists, the IMF and the OECD have all lowered their demand expectations because of the virus, with the infection in the global economy spreading. At odds, however, may be the break-evens for the world’s major oil producers. The Kremlin has said it’s fine where things are now, though Riyadh may be happier with Brent around $80 per barrel. What OPEC+ needs is a Goldilocks Moment; a reaction that’s juuuust right to soothe the market without jeopardizing the inevitable return to normalcy.
Another challenge is Libya. The North African producer has been sidelined by civil war since ports were closed in January. Mustafa Sanalla, the head of Libya’s National Oil Co., said he expected production would soon return to 1 million bpd, which if realized would render the Saudi proposal moot. On central bank rate cuts, former US Treasury Secretary Larry Summers said through Twitter that “monetary pyrotechnics” must be “balanced against the alarm they may cause and the way they leave central banks exposed as lacking effective tools.” In both cases – OPEC’s and fed policy – playing your ace now leaves you without a move should someone show up with a Trump card.
On more technical matters, the EIA reports crude oil inventories at 10:30 a.m. ET. The API late Tuesday reported a build of 1.7 million barrels for the week ending February 28. Gasoil cracks in Asia, meanwhile, are plummeting as regional industrial activity slows. The huge premium expected from the IMO sulfur cap on marine fuels never materialized. Data out already show the Italian economy, under severe strain from the coronavirus, had already contracted some 0.3% sequentially in the fourth quarter. US mortgage applications, meanwhile, surprised to the point that it looks like a typo. Equities may get some support from former US Vice President Joe Biden’s victory over Vermont Sen. Bernie Sanders in the “Super Tuesday” primaries, though the outlook for commodities is uncertain.