The GERM Report

-The market is extremely fickle.

-OPEC stands pat on outlook.

It may well be the third quarter before demand resumes in the US economy. That was the word from US Federal Reserve Vice Chair Richard Clarida, who delivered a message late Tuesday to the Foreign Policy Association in New York. That followed testimony from Fed Chief Jerome Powell, who told US lawmakers the downturn in GDP is expected to be the most severe on record. Meanwhile, resurgent cases of the novel coronavirus in China and complacency in some US states have raised concerns about the prospects for a swift economic rebound. On the supply side, OPEC+ compliance is bullish, though US producers may have a thing or two to say about that.

The price for Brent crude oil oscillated for much of the previous session, closing up some 3%. The rally was supported by a 3 million barrel draw in Cushing reported by the American Petroleum Institute. A new wave of uncertainty, however, is dragging on black gold early Wednesday, with Brent trading down some 0.7% as of 8 a.m. ET to $40.70 per barrel.

Clarida in a videotaped message to the Foreign Policy Association rattled off a long list of historically weak data points in the US economy. By April, US unemployment rates hit an 80-year year and GDP is “falling deeply.”

“In my baseline view, while I do believe it will likely take some time for economic activity and the labor market to fully recover from the pandemic shock, I do project right now that the economy will resume growth starting in the third quarter,” he said.

Powell echoed the sentiment that economic recovery was dependent on pandemic recovery, saying that until large parts of the public are confident the coronavirus is contained, a full recovery is unlikely.

His warnings about public health were cast into reality. Parts of the Chinese capital, Beijing, are under lockdown after a fresh wave of coronavirus infections. A handful of US states, most led by Republican governors eager to reopen their economies, saw fresh new highs in infections. That suggests any collective sigh of relief was premature. For the economy, the public health concerns have damaged investor confidence and led to a high degree of market uncertainty.

“Crude futures were again unwinding the previous session’s gains as trading began for a new day in Asia, repeating a pattern seen since Monday,” Vandana Hari, Founder and CEO of Vanda Insights, stated in a newsletter emailed to The GERM Report. “But as evident from the frequent reversals in price direction throughout the day since last Friday, market sentiment remains fickle.”

Immutable, however, was the forecast for global demand for economists at the Organization of Petroleum Exporting Countries. The International Energy Agency in its monthly report, released Tuesday, offered something for the bulls and bears alike. But while OPEC sentiment was largely unchanged, it remained largely damning. OPEC economists expect the US economy to shrink by 5.2% this year and by 8% for the euro-zone. On the positive side, OPEC sees the contango structure flattening out considerably, showing the oversupply concerns are fading and the market is balancing out. Nevertheless, demand for OPEC crude oil was revised down by 700,000 barrels per day to 23.6 million bpd, nearly 6 million bpd lower than last year.

That demand was reflected in US imports. An armada of Saudi crude oil tankers upended the balance in the US market recently, but no more. Fleet monitoring from the Bloomberg news service found Saudi Arabia has shipped just one cargo of crude oil to the United States so far in June. That’s equivalent to about 10% of what it shipped in April and would mark the lowest pace in 35 years if the trend holds through the rest of the month. That would be supportive of crude oil prices as it becomes manifested in lower storage levels in the transparent US market. But be careful. The market has rebounded sharply from the unprecedented lows in April. So much so that many of the same players that were pleading for state-driven production quotas are boasting of recovery in the US shale patch. And in Alaska, ConocoPhillips said that 100,000 bpd in voluntary curtailments announced in April will end next month.