Market Perspectives June 2020
Financial markets have bounced further from March’s sell-off as more countries ease COVID-19 restrictions. But risks of another bout of COVID-19 infections and geopolitical tensions remain.
05 June 2020
5 minute read
By Gerald Moser, London UK, Chief Market Strategist
As quarantine measures are eased and sentiment improves, positive supply cut news bodes well for oil. Meanwhile, worrying geopolitical tensions, risks of another round of COVID-19 infections and low interest rates mean that prospects for the yellow metal look encouraging.
The West Texas Intermediate oil price almost doubled in May, continuing its recovery. A combination of deeper than expected supply cuts from oil producers and better than expected demand, notably from China, aided sentiment towards the commodity.
OPEC+, a group comprising members of the Organization of the Petroleum Exporting Countries (OPEC) and other leading oil producers such as Russia, had agreed to cut their combined output by almost 10m barrels per day (bpd) in May and June. While unprecedented in magnitude, the move only partially compensated for a fall in demand that topped 20m barrels a day at the peak of the crisis in April.
There have been questions around OPEC+’s commitment as previous agreements have been at times only loosely implemented. Saudi Arabia usually compensated for smaller countries producing more than their quota in such circumstances.
But this time is different. It seems that the most important producers within OPEC+ are complying with the cuts, notably Russia. In addition, the three biggest OPEC+ producers (Saudi Arabia, Kuwait and the United Arab Emirates) also announced that they would voluntarily cut by an additional 1.2m bpd. And while the self-imposed restriction was supposed to be eased to 8m bpd starting in July, there are now talks about keeping the current production level for another few months.
Other oil producers outside of OPEC+ have drastically reduced supply to reflect the deteriorating economics of the oil market. The International Energy Agency reports that supply from outside the alliance was already 3m bpd lower than at the start of the year. The latest trend of rigs in operation, suggests that US production has fallen further (see chart).
With the recovery faster than expected in China, and most of Europe emerging from lockdown in the next couple of months, demand will continue to increase. But despite those positive developments, the oil price is unlikely to continue to rise as fast as it did in May, as large inventories still need to be reduced. We expect it to be rangebound in the near term.
Gold has rallied by 15% from the lows reached in March. We continue to see compelling arguments for the gold price to move higher over the next 12 months.
Positive news on the science of fighting the pandemic, such as a successful vaccine or a drug treatment, might trigger weakness in the short-term, as investors flee gold for riskier assets. Encouragingly, this would likely encourage increased demand for jewellery in places like India and China, where demand for gold collapsed in the past three months.
We also believe that geopolitical tensions, risks of a second wave of COVID-19 infections, record balance sheet expansions from major central banks and potentially higher inflation on the horizon all support higher gold prices in the long term.
Financial markets have bounced further from March’s sell-off as more countries ease COVID-19 restrictions. But risks of another bout of COVID-19 infections and geopolitical tensions remain.
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