The GERM Report

-Behold, the second wave.

-Is Brent due for a correction?

Crude oil prices were in retraction early Wednesday amid concerns about a second wave of coronavirus infections in the United States, renewed Sino-American trade tensions and a build in US crude oil inventories. Optimism over OPEC+ discipline and the gradual return of demand helped establish a $40 per barrel floor under the price of Brent, up from the $38 level at the start of the month. Last week, the futures structure for Brent showed that balance was on the horizon, though that structure has now reversed. While a correction is a few dollars per barrel away, the bull run for crude may be near the finish line.

The price for Brent crude oil moved from black to red in Tuesday trading after the American Petroleum Institute reported a build in US crude oil inventories. The downbeat sentiment continued into the Wednesday session, with Brent trading down some 1.8% as of 8 a.m. to $41.84 per barrel.

US President Donald Trump again reached for the economic holster to fire shots at friends and foes alike. Early this week, the president was forced to correct his top trade advisor, Peter Navarro, who told Fox News the US-Chinese trade deal was over because of the perception that Beijing exported the coronavirus to American soil. Highlighting the internal disorder in the White House, US Secretary of State Mike Pompeo said trade ties were too entrenched to unravel overnight, countering Trump’s campaign message of decoupling from China.

“… the challenges of American economic growth and prosperity are deeply intertwined today with the Chinese economy,” Pompeo said.

A trade war between the two leading economic powers throttled economic growth last year, before the onset of the viral pandemic pushed GDP into negative territory. Hopes for a breakthrough emerged early in the year, through conflicting statements on the status of a trade deal continue to spook investors. Now, after word emerged that the European Union would enact a travel ban on US visitors because of second-wave infection rates, the president has again turned his ire toward Brussels with threats of $3.1 billion in tariffs. The tariffs are part of a protracted fight over aircraft subsidies, though the timing is peculiar. European leaders meet today in Brussels to discuss opening European borders again and for whom.

In the United States, a second wave of coronavirus infections has investors worried. In Texas, the state reported a staggering 5,000 new cases on Tuesday. Texas Gov. Greg Abbot, who has been criticized for opening the state up too early, tightened social restrictions and urged his constituents to take personal responsibility in containing the outbreak. Apart from its role as a lead oil producer, Texas is also vital manufacturing hub for the United States. The Dallas Federal Reserve issued a deep red reading for its weekly economic index, saying a recent decline in consumer confidence had outweighed positive signals such as increases in retail sales and steel production.

Texas will figure large in Wednesday trading when the US Energy Information Administration releases official data on inventory and production levels for the week ending June 19. The API reported late Tuesday that US commercial crude oil inventories swelled some 1.8 million barrels, though gasoline and distillate levels showed demand still present in the US economy. Consumer fuel demand has declined somewhat, and early signs of recovery were from extreme lows.

Structurally, the market is looking like it’s settling in at a band around $41 per barrel for Brent. The futures structure slipped into backwardation last week, though the reversal to a market signal showing balance coincided with quad witching, typified by the simultaneous expiration of market index futures, stock futures, market index options and stock options. The Brent structure has now flipped back into contango, suggesting the $40 mark could hold for awhile. Vanadana Hari, founder and CEO of Vanda Insights, said from Singapore there had been a “cheer premium” supporting the price of crude.

“We may also be seeing a post-lockdown burst of spending from pent-up demand that could soon give way to a structural slump,” she wrote in a newsletter emailed to The GERM Report.