OIL MARKET WEEK AHEAD Hunkering Down

Next week will bring an ample amount of economic indicators but for the oil market the most serious ones will be information on the spread of the coronavirus. As the number of cases on both sides of the Atlantic are rising and the UK, Europe, and some US states are beginning to lockdown, one way for investors to weather the storm is to focus on the end point.

Boris Johnson is preparing the British public for a lockdown of pubs, bars, gyms, cinemas and parts of public transport that could last three months, so this marks a useful time to take a look at some key points in the development of the virus and the social and economic impact on countries that are beginning to come out the other end:

Source: Johns Hopkins University

While the table above does not allow any direct conclusion about how long the outbreak will last in different countries because it depends on multiple local issues, the worst of the virus and the work stoppages in China lasted about two months and in South Korea, where the approach was stringent, it was less than that. In Italy, by contrast, the spread across the country remains explosive, with nearly 5,000 cases reported in the last 24 hours. This means that it would be too optimistic to suppose that industrial production and domestic consumption life will return back to normal in only a few weeks, but on the upside there is clearly an end point to the spread, depending on how it is handled.

Russia-Saudi spat and President Trump

President Trump has vowed to get involved in the spat between Russia and Saudi Arabia about increasing oil production into a declining market and said he would make a move at “an appropriate time.” However, all of Russia and Saudi Arabia’s output plans for April, when they were meant to significantly increase sales to China and other markets, may soon become academic as both countries hunker down for the spread of COVID-19. There are only 253 reported cases in the Russia but the country has begun locking its borders, stopping international flights, and announcing a state of high alert across all of its 85 regions. It has banned large gatherings and is encouraging people to work from home and moving school classes online.

The highest density of Russia’s oil production is in West Siberia, a relatively remote area where cities are far apart but well linked with a rail and road network. The number of cases in Saudi Arabia is on a par with Russia but the Arab kingdom has so far only launched a health awareness campaign. With the spread of the virus raging in Iran, across the Gulf from Saudi, this may not be enough, particularly as Iran reported 1,200 new cases on Friday. 

Oil producers to cut down on costs

With the coronavirus spread raging in Europe and taking hold in the US, oil producers are cutting down their costs as far as they can without having to cut actual production. France’s Total plans to freeze recruitment, increase cost cutting and abandon its share buyback program.  BP is cutting the number of its staff working in the North Sea and is looking at other cost cutting measures, while Shell has quarantined a worker on one of its North Sea platforms. Major US producers have yet to make any major changes to their output, but smaller ones are struggling to keep afloat. The week ahead is likely to bring in some cuts in the US, be it in the number of rigs and platforms, staff or overall cost saving measures.  

The few items of data still worth following next week are:

• API weekly petroleum stocks Tuesday
• EIA petroleum report on Wednesday
• US initial jobless claims Thursday
• Baker Hughes rig count Friday
• CFTC commitment of traders Friday