-A rolling recovery will separate the winners from the losers
-Saxo Bank: Oil prices are at a point where cheating becomes attractive to producers
Crude oil prices were in rally mode early Thursday on continued signals that some parts of the global economy are opening back up. China announced further stimulus efforts that it said were “appropriate” and “prompt.” And after a big hit to the British economy, the Bank of England said it expected a strong recovery in 2021. In the US shale market, hobbled by black swan events, some operators are pondering a decent life at $30 something a barrel. But there are as many danger signs and warnings about an impatient comeback as there are signs of recovery. Too much too soon and some economies could be in for another hit.
Brent crude oil was up 6.4% at 8 a.m. ET to trade at $31.64 per barrel, after dipping into the upper $20s in the previous session. A rebound in refinery activity, stable equities and increased demand for some petroleum products were driving the rally early Thursday.
The Chinese government reported that first quarter exports of goods were down 11.4%, but surged 8.2% year-on-year in April to just shy of $200 billion. Global trade for the world’s second-largest economy saw foreign trade diminish because of demand destruction, but was steady in Southeast Asia and in countries tied to China’s ambitious Belt and Road initiative. Elsewhere, the government announced relief measures for small businesses, extended support for some social programs and cut electricity and gas rates for the first half of the year. Chinese Premier Li Keqiang said the response to the economic pressures has been adequate so far.
“In other words, our policy response is appropriate in its intensity and prompt in timing,” he was quoted by the official Xinhua News Agency as saying.
Rather than shy away during the worst of the economic crisis brought on by demand destruction, China filled its strategic reserves with cheap oil at double its normal rate last month. That coincided roughly with the free-for-all for Russia and Saudi Arabia, two production giants that spent much of the first quarter locked in a battle for market share. On Thursday, and with OPEC+ production restraint in force, Saudi Aramco raised the price for June light-crude oil to Asia by $1.40 per barrel, by $1.50 to the United States and by $6.55 for Northwest Europe, according to Reuters. That adds strains on the demand side. On the production side, Ole Hanson at Saxo Bank said on Twitter that crude oil prices were approaching the point that cheating becomes attractive.
“The speculative-driven rally currently pushing WTI and Brent higher carries the risk of becoming self-defeating with prices approaching levels where producers postpone or abandon plans to reduce production,” he stated Thursday.
While China recovers and Saudi Aramco exploits the rebound, other major economies continue to falter. Private payroll processor ADP reported a 20.2 million cut in US headcounts last month. Official figures on Friday could put the US unemployment figure at 16%. The European Commission forecast a 7.4% contraction for the bloc and predicted the “deepest economic recession in its history.” Not to be outdone, economists at the Bank of England on Thursday stated they expected the British economy to shrink by some 14% for its largest decline since the early 1700s. And that’s not a typo, though a sharp recovery is expected next year.
China was the first to hobble and may be the first to recover. That may skew the recovery prospects elsewhere in the global economy as rolling re-openings take place as the upswing in commodities becomes prohibitive.