Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Who is tougher, global central banks or the coronavirus? The stock market had its biggest one-day point gain in history after reports of plans for a phone call meeting from global central banks. While we all know that monetary policy can’t cure the coronavirus. We also know that it is foolish to fight central banks because they can print money until the ink runs out and then they’ll just make more ink. Of course one could argue that the global central bank’s response won’t fix supply chains, and their policies eventually will lead us to fiscal ruin. Oh sure, make those arguments while bears get run over and look like Wile E. Coyote after it has an encounter will a roller compactor.
Still, central banks could disappoint. Reuters reports that, “the Group of Seven(G7) nations are drafting a statement outlining a plan to soften the economic hit of the coronavirus but which so far excludes direct calls for new government spending or coordinated central bank rate cuts, a G7 official said on Tuesday.” The report does not seem to have dampened the market rebound sentiment, and the buybacks continue.
For oil that rebound and potential of stimulus and rate cuts, should boost not only demand but look more attractive as an expected U.S. interest rate cut should ease the dollar. With reports that China’s factories are coming back online, we are starting to get a timeline on when they would begin to get back to normal. It will not be years but a matter of months.
That will make OPEC’s job a little easier. Even though Russia likes to join OPEC cuts at the last-minute to keep the drama going, a source at Lukoil reportedly spilled the beans. They got the word that Russia will cut production by as much as 300,000 barrels of oil production a day to cement at least a 1 million barrel a day production cut total. OPEC and Russia have vowed not to cancel its June 5th and 6th meeting in Vienna despite coronavirus fears.
At the same time, Reuters is reporting that already OPEC oil production is at the lowest level since 2009. Not because of the coronavirus but mainly because of the civil war in Libya. While the market has been focused on OPEC and Russian negotiations and the coronavirus, the oil supply picture has been pretty tight ahead of all of the oil demand destruction.
Saudi Arabia and other Gulf members also over-delivered on a new production-limiting accord, a Reuters survey found. Reuters says that on average, the 13-member Organization of the Petroleum Exporting Countries pumped 27.84 million barrels per day (bpd) last month, according to the survey, down 510,000 bpd from January’s figure.
Despite the drop in supply, crude prices have slipped to below $50.00 a barrel on concern that the coronavirus outbreak will cut oil demand. OPEC and its allies meet this week to discuss further steps to support the market. OPEC, Russia, and other partners, known as OPEC+, agreed to deepen an existing supply cut by 500,000 bpd from January 1, 2020. OPEC’s share of the new reduction is about 1.17 million bpd, to be made by ten members, all except Iran, Libya, and Venezuela. The 10 OPEC members bound by the agreement easily exceeded the pledged cuts in February thanks to Saudi Arabia and its Gulf allies cutting more than called for. Still, an increase in production by Iraq and Nigeria – both laggards in delivering on previous OPEC+ agreements – meant that OPEC complied with 128% of the pledged cuts in February, the survey found, down from 133% in January.
In the meantime, more people are recovering from COVID-19. That is giving us hope for an economic bounce in a few months.
Natural gas got a bit of a rally even though this market is having a tough time fundamentally. The Wall Street Journal reported that last week the chief executive of Cheniere Energy Inc., the largest U.S. LNG shipper, said two separate overseas customers had canceled deliveries scheduled for April from its facilities in Louisiana and Texas even though they’ll still have to pay the exporter fixed fees. The canceled cargoes are just two of 40 that Cheniere had anticipated for April. Executives said they don’t expect widespread curtailment of LNG production. Still, they acknowledged troubles in what had been one of the energy industry’s few bright spots in recent years. “There is some weakness which has been caused and compounded by several factors, including weather, supply additions and more recently the public health situation in China,” Jack Fusco, the CEO, told investors on a conference call Tuesday. Analysts still generally expect global LNG demand will grow and lift U.S. gas prices from their depressed levels, but probably not this year. Some exporters are having trouble signing up long-term buyers of LNG, which are usually necessary before construction financing can be obtained.
It will be another wild day! Make sure that you stay tuned to the Fox Business Network for all of the latest twists and turns.
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