Oil is coming back in a classic turnaround Tuesday fashion as the market is starting to realize that a 22% correction in the price might be a fair assessment of the demand destruction created by the coronavirus so far. While the fallout from the coronavirus is not clear, we know there are attempts by China to get back to work. Factory restarts and the reality that China can’t stay locked down forever is giving oil some support, along with billions of dollars of Chinese economic stimulus. This, along with a slowdown in reported cases of the virus, is offsetting short-term concerns of China’s significant demand drop.
The comeback in oil happens even as Russia can’t make up its mind when it comes to supporting more production cuts. Russian Energy Minister Alexander Novak says Russia is studying the market and needs more time “to assess the situation and determine a balanced approach based on market interests.” I am sure Novak can’t make up his mind on what to order at a restaurant, either. Yet reports say Russia and OPEC plan to meet on Wednesday.
In the meantime, oil recovery is also facing headwinds from a rising dollar. The coronavirus has brought safe-haven buying back into the U.S. dollar making testimony from Federal Reserve Chairman Jerome Powell more critical for oil traders. Traders want to see if the Fed would be amenable to cutting rates because of the economic hit from coronavirus. If the Fed sounds more dovish, it will help oil attempt a recovery and maybe, if there is no bad news, put in a bottom.
Yet the virus still may have the final say. Reports that the virus is starting to run its course has the stock market flirting with record highs. Oil traders may begin looking past the glut and turn their thoughts to pent up demand. The market has a chance to be at a bottom as long as the virus news continues to get better.
Inventories are also going to be in play. The American Petroleum Institute will give us our first glimpse. We are likely going to see increases across the board.
Natural gas also is dealing with major oversupply issues. The nat gas tanked as winter is too mild to save us from massive oversupply. Production levels show no real sign of easing and energy infrastructure that has not caught up with or record production is not helping either. Someday, years in the future, we will look back and not believe how cheap natural gas was today.
The Phil Flynn Energy Report: February 11, 2020
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