Crude was up modestly after the US holiday weekend, benefitting from a robust Asian opening in equity markets and seemingly shrugging off the possible demand implications of the spike in Covid-19 cases across the US and other countries such as Australia.
While concerns remain about the increasing coronavirus infection count recently, both supply and demand seem to be moving in the right direction. However, it will be the government's healthcare responsiveness to these virus hotspots and the ability of the soft lockdown measures to control the spread that could ultimately be the litmus test for the oil market.
Fourteen states reached a record high of new cases in the past five days (California, Florida, Texas, Arizona, Georgia, South Carolina, Kansas, Missouri, Oklahoma, Wisconsin, Ohio, Alabama, Arkansas and Montana). The second wave of Covid-19 is spreading to the mid-west states after southern states and the west coast; these states comprise 45% of the total US GDP.
The bright side of the US data is that Covid-19 fatality rates continue to reduce in southern and western states (Texas, Florida and California), even as ICU bed capacities are surging in these areas. Also, north-eastern states haven't seen a resurgence of new cases. The lower fatality rates suggest that the re-imposing of more extensive statewide or countrywide lockdown measures will be unlikely, so the economic cost from the second wave will be far less than the beat-down in March.
Support continues to be derived from last week's Wednesday's inventory data, the steep fall in US production, OPEC compliance and strong macro points – primarily the robust US jobs data released last Thursday. However, the continued rise in Covid-19 cases across the US Sun Belt region creates unease around the prospect of demand.
Still the faltering re-opening of the USA is also partially offset by the muscular approach by Saudi Arabia; they’re seeking to enforce compliance with OPEC+ quotas – both are currently important in maintaining market balance and ultimately drawing down global inventories.
Still, it seems traders are getting more accustomed to minor retracements and rallies than expecting a significant pullback as a range trade mentality continues to resonate where Brent $40 per barrel does give the appearance of something of a floor.
With the market torn between robust cyclical data and rising virus case counts in the Sun Belt, putting in significant headroom above $WTI 40 was also challenged by a possible resumption of US shale production as price move higher. No less concerning is the prospect of OPEC+ rolling back cuts in August.
OPEC's planned July 15 meeting may address the possibility of once again extending the deepest phase of the OPEC+ production cut agreement. It should be clear that OPEC will do what it can to reassure markets and support oil prices, but the critical challenge for the group in the near-term might be maintaining discipline if US production starts to rise.
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