In the coming months, my range-bound price forecast remains anchored to the view that OPEC compliance will provide a dependable price plank. At the same time, bullish ambitions will continue to be thwarted by the Covid-19 demand risk. With that in mind, I would expect commodity and cross-asset traders to look for different sandboxes to play in as the market shifts view on oil as an absolute risk-on trade to one of relative value until the epi curve flattens and oil demand picks up again.
A favorable outcome from last week's OPEC+ meeting and a big draw in US crude and product inventories helped oil recover from a sharp decline early in the week, closing up 3% on the week.
But with global daily Covid-19 case counts still rising and the US Sun Belt’s most populous states showing little success in bending and containing the epi curve, concerns about the post-Covid recovery pace are limiting the upside for oil.
However, proper combined compliance from the OPEC+ agreement and Saudi Arabia's influential actions to rectify under-compliance by some producers in May and June also suggest negative scenarios are less likely. A rebound in US production and Covid-19 infections remains a lingering concern, but the medium and longer-term trajectory looks broadly positive.
Uncertainties remain in the shape of Covid-19 cases but they’re getting tempered somewhat by positive news of potential vaccines or remedies.
The seeming paradox of rising oil prices in the face of apparently diminishing US economic fundamentals as Covid-19 rampages through some of the most economically productive states suggests that China does count. With V shape recovery thoroughly entrenched on the mainland, as demonstrated through China's Q2 GDP which was far more robust than expected, a favorable global economic blueprint remains intact if this gnarly steepening epi curve can be tamed.
Beijing will lower the coronavirus outbreak's emergency response level in the Chinese capital to Level III from level II starting on July 20, a municipal government official said on Sunday. This positive news should help elevate some domestic virus fears and lead to a bounce-back in China retails consumer demand.
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Yields are up, but it was a tale of two divergent tapes in US equity markets; Oil heads lower as dollar strengthens; Gold takes the express elevator down