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Energy commodities cues continued their downward spiral as fears over contagion from the new coronavirus gripped markets. WTI crude has staged for 4th consecutive week’s price slumps, dipped about -2.89%, currently trading at $52.69 levels. While Brent crude slid about -4.80% to currently trading at $57.73 levels.
The BCOM index dropped 2.1% this week, led by energy and industrial metals which fell 5% and 3.2%, respectively. However, weakness was seen across most commodity sectors, undoing much of the positive sentiment from the signing of the US-China trade deal last week.
Crude oil declined sharply last week as well with Brent down 5.1%, and WTI lower by 6% as worries over the coronavirus spreading raised comparisons to the SARS epidemic of 2002-03. The prospect of another health scare similar to SARS raised concerns over China’s (as well as EM Asia’s) economic growth, and the resulting impact on oil demand growth.
JPM’s oil strategists indicated that China’s oil demand growth slipped by 400 kbd between 1Q03 and 2Q03 during the height of SARS crisis, with the rest of Asia also seeing weaker demand growth, which was partially responsible for a $5/bbl shock to oil prices on a quarterly basis. Oil markets continue to dismiss geopolitical supply risks while a new threat to demand growth emerges. The health crisis overshadowed last weekend’s developments in Libya and Iraq, which saw forced production outages.
Crude oil strategists suggest the market continues to discount geopolitically led supply-side risks, and view $1-2/bbl risk premium on top of their price forecasts as justifiable, given the recent escalation in the Middle East. DOE stats were mixed as crude stocks drew unexpectedly though gasoline inventories in the US reached record highs.
Trade recommendations: The crude oil strategists remain long ICE Brent Aug’20 on constructive fundamentals, seeing value at current market pricing.
We also advocated derivatives trades on crude oil, longs in CME WTI futures of January’2020 month deliveries, we now wish to continue by rolling them over for February deliveries on hedging grounds. Courtesy: JPM
