Crude Oil WTI Price chart

Source: IG Charts

OUTLOOK: BEARISH

  • Crude oil prices may retrace gains if coronavirus cases grow, impeding growth prospects
  • Powell, Mnuchin testimonies and FOMC minutes may cast a dark, deep bearish shadow
  • Tension in Hong Kong, China’s national security bills may spark protests, hurt crude oil

Rising Coronavirus Cases in US Threaten to Derail Fragile Recovery

Crude oil prices may be at risk if the growth outlook from the world’s largest economy is put into doubt at a time when acute uncertainty is embedded in every sector of the global economy. Texas has seen an unusually high number of Covid-19 cases with reports indicating the number of Intensive Care Units (ICUs) are almost maxed out, particularly in the Houston area.

US Witnessing Surge in Coronavirus Cases

US Virus cases

Data was retrieved on June 25 at 23:00 GMT. Figures since then will likely have shifted.

While unemployment figures continue to surge, optimism about a relatively faster recovery has boosted risk appetite and pushed cycle-sensitive assets like crude oil higher. Aggressive easing measures by central banks all over the world and the deployment of a plethora of credit facilities and unorthodox policy measures like quantitative easing has also been a major contributing factor in buttressing risk appetite.

Economic Data Performing Better Than Expectations, Helping to Push Crude Oil Prices Higher

Citi econ surprise index

Source: Bloomberg

Initial jobless and continuing claims data will be released this week in addition to closely-scrutinized nonfarm-payroll data. A worse-than-expected reading there could put a sour taste in the mouths of investors who were hoping to find sweeter figures to reinforce their bullish narratives. Consequently, a disappointment there could sink demand for crude oil, a notoriously cycle-sensitive commodity.

Brent Eyes FOMC Minutes, Powell & Mnuchin Testimonies

Crude oil prices may also get a shock from the release of the Federal Open Market Committee’s (FOMC) minutes, following the interest rate decision earlier this month. An doubtful tone in the text about the prospect of a recovery could cast a dark, deep shadow over crude oil prices. Treasury Secretary Steven Mnuchin and Fed Chairman Jerome Powell will also be testifying in front of the House Financial Services Committee.

Commentary here could also elicit volatility, but for traders it gives them an opportunity to hear from key policymakers and what they are watching. Mr. Powell has in recent times stressed that medical metrics are the most important indicator to monitor because of how political, fiscal and monetary policy are crafted based on prevailing public health trends.

In addition, the Chairman has warned that the uncertain circumstances means data reports may show sporadic developments, thereby increasing the chance of higher bouts of volatility. An example of this was the recent publication of jobs data that showed the economy added over two million jobs. More realistically, the US had reclaimed those jobs and still has a multi-million, unemployed-persons hole to fill.

Hong Kong Tension May Pressure Crude Oil Again

Reignited tension in Hong Kong amid the coronavirus pandemic could worsen the growth outlook and further widen the geopolitical rift between China and the US over the autonomous region. As the IMF wrote: “Geopolitical tensions or broadening social unrest in response to rising global inequality could lead to a reversal in investor sentiment”.

Stay up to date on geopolitical shocks affecting markets by following me on Twitter @ZabelinDimitri

Crude Oil (Brent and WTI), Hang Seng Index

Crude Oil versus Hang Seng Index

Crude oil chart created using TradingView

Escalation here could in-turn spoil risk appetite and push crude oil prices lower along with regional equity markets. The Chief Executive of Hong Kong, Carrie Lam, will be giving a speech this week three days after lawmakers in China’s National People’s Congress would have concluded an intense round of meetings regarding national security laws in the Special Administrative Region.

— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter





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