Oil Down On OPEC Disappointment But V-Shaped Economic Recovery Offers Bigger Solace

MUFG points to China as a marker for remarkable gains in the second half of 2020: File Image/PixaBay

Disappointment in the investment community over the Organization of the Petroleum Exporting Countries (OPEC) agreeing to extend their output cuts by one month but Saudi Arabia deciding to end extra reductions resulted in oil prices dropping on Monday.

West Texas Intermediate fell $1.36 to settle at $38.19 per barrel, while Brent slumped $1.50 to $40.80 per barrel.

Damien Courvalin, an analyst at Goldman Sachs, observed, "With OPEC's latest cut already more than priced in, we now forecast a pull-back in prices in coming weeks," and he added that Brent could slump to $35 per barrel in the short-term.

Robert Yawger, director of the futures division at Mizuho Securities, said, "The nature of the OPEC+ deal is not the golden bullet solution that it is advertised to be."

Analysts also warned on Monday that the recent rally in crude prices could actually be detrimental to market recovery: Warren Patterson, head of commodities strategy at ING, said, "It's been amazing, but the big uncertainty is if you look at refinery margins, they are very weak across the board across the board across all regions.

"And what that suggests is that maybe demand isn't recovering as quickly as many had anticipated, or at least it's not keeping up with the move higher that we've seen in crude oil prices."

Amrita Sen, chief oil analyst at Energy Aspects, agreed with this outlook and thought that prices have "overshot to the upside....because demand is fragile."

Still, the overall sentiment from the experts is one of optimism that markets will recover from the government-imposed coronavirus lockdowns - dramatically so.

Ehsan Khoman head of Mena research and strategy at MUFG, said the "sheer velocity" of the rebound coming from China "Offers reasons for optimism surrounding demand recovery trends in developed economies and other emerging markets; the sharp revival of Chinese oil consumption is a welcome marker for the global economy in the second half of this year."

This view was supported on Monday by Nasdaq posting a record closing high on Monday, becoming the first of the major indexes to confirm a new bull market; the S&P 500 also ended in positive territory for the year, reflecting growing expectation that instead of a Nike swoosh, the economic recovery will be V-shaped.

And even though the U.S. economy entered a recession in February, the sentiment is that it might be the shortest recession on record.

Even though protests have replaced the coronavirus as the new main media concern, the worry prior to the civil unrest was that a second wave of the disease would occur later in the year and compel governments to resume their choke hold on world economies; however, with each passing week the medical community makes quantum leaps forward in developing a vaccine.

Case in point: Oxford University said a vaccine in the form of an inhaler is targeted for public availability as early as this coming September.

Also, a second major vaccine trial is set to start in the UK next week, with another planned for October - and if they are successful the Imperial College of London believes a vaccine could be distributed early next year.

Meanwhile, health authorities continue to flip flop on matters pertaining to the virus, and the latest assertion from the World Health Organization is that the asymptomatic spread of COVID-19 - which  health experts working for governments cited to justify continued lockdowns - is "very rare."

Dr. Maria Van Kerkhove, head of WHO's emerging diseases and zoonosis unit, said on Monday, "From the data we have, it still seems to be rare that an asymptomatic person actually transmits onward to a secondary individual," and she added that government responses should focus on detecting and isolating infected people with symptoms.