Scraping the Barrel
Despite what was said to be a solid OPEC+ meeting, and with oil markets for the most part content looking through the recent inventory builds – mostly a result of significant Saudi import volumes which are somewhat backward-looking – oil markets turned unreservedly defenseless to a post-lockdown uptick in Covid-19 infections in the world's largest oil consuming economy, the humungous US markets.
Once the steamroller started moving downhill, gravity took over. Negative sentiment was then aggravated by comments from the US FED about the potential for prolonged economic damage resulting from the very same virus.
If a widespread secondary outbreak is confirmed it will undoubtedly threaten to bring the US economy and global markets to its knees once again.
It’s been one-way traffic since yesterday's Asia open, where everyone's game plan was interrupted by 2,504 new confirmed coronavirus cases reported in Texas. Arguably that single headline was more impactful on market sentiment than anything else overnight, specifically around equity and oil markets that have been trading favorably on hopes for an economic recovery, absent a secondary outbreak of the virus.
Gradually, bids have started to appear around the WTI $35.50- 36.00 level, due in no small measure to OPEC+ discipline. Still, the market inclination to take profits and/or sell on any hint of bearish headlines, particularly around secondary Covid-19 outbreaks, will remain in full force.
A pullback was inevitable, given the plethora of near-term risk for oil. Given how sickly the market remained due to supply overhang and a patchy demand recovery, I was telling clients in my market note yesterday to expect WTI $35-40 for the rest of the week when oil was trading $38.50 at yesterday’s NYMEX close (a huge negative skew). But a teary-eyed - 9% one-day capitulation was unequivocally not in the cards and perfectly illustrates just how destructive a second wave of the virus could be on growth assets.
Still, it's only a three dollar slide. And in the context of 50 years of price turmoil, the overnight move in oil markets is well within the expectations of more prominent oil market participants. It's certainly not time to throw away the recovery playbook just yet.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower