Markets positive on US but in fear amid an oil supply glut

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Markets positive on US but in fear amid an oil supply glut

 Markets positive on US but in fear amid an oil supply glut

Coronavirus cases worldwide have had topped 2 million with more than 1,50,000 fatalities and still rising, at the time of writing. The global economy, gripped with lockdowns, is experiencing the worst economic fallouts it has not seen in decades.

Cash flow slumps, supply disruptions and default rates are spearing across industries due to the economic downturn caused by COVID-19. The output loss associated with this health crisis is much higher than the losses that prompted a global financial crisis. However, a lot of countries are now reporting a slower rate of rising in COVID-19 cases and are flattening the curve which has been seen as positive developments by the markets.

On April 17, stocks gained with US Equity Futures after President Donald Trump rolled out a 3-phase plan to kick start the economy was seen as a positive development amongst investors. Although investors are keeping an eye on dismal data from China.

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Additional reports sparking investors’ hopes of coronavirus treatment that 125 patients were discharged after treatment with Gilead’s drug named remdesivir helped stocks to surge. The Stoxx Europe 600 Index, contracted on S&P 500 and Asian stock markets including S&P/ ASX200 Index, which was up by 1.3% from the previous day, also received a boost after the drug development news and hints of opening up of US economy.

US crude Futures slumped to an 18-year low after OPEC reduced its global demand prediction and Brent crude slipped under $28 a barrel.

Trump reveals a 3-phase plan

The US has become the worst-affected country by a coronavirus which has infected 7,10,021 people and killed 37,158 people till date. Hot spot areas like New York and Washington are seeing a lesser rise in cases and are flattening the curve.

Slowing number of cases in most of the US states due to strict social distancing and closure of schools and businesses are supporting to bring down the effect of the virus. However, it is still not evident that the cases are dropping and there is a possibility of the cases to grow even after slow growth in cases than what has been earlier.

US President Donald Trump has unveiled a 3-phase plan to reopen stalled economy amid coronavirus. He handed over a road map to governors, who will further take a decision on lifting curbs within their states, to recover from the economic fallout of coronavirus pandemic. He asserted on the need to not open all at once but one step at a time with opening up states that are in less trouble than others. The plan aims to alleviate the threat of a resurgence of the pandemic and safeguard the highly vulnerable group.

To begin with, states must have met a downward course of cases within a 14-day period known as “gating criteria” as well as hospital preparedness. If states meet this criterion, then they can enter Phase 1.

Phase 2 guidelines apply to states where there is zero indication of a bounce-back that fulfil the gating criteria in a second time.

Phase 3 would be for states where there is no indication of a bounce, and that meet the gating criteria for the third time.

While Trump asserted the need to reopen the economy, many business leaders, governors, and lawmakers worried on the need for better testing, to begin with, the easing of social distancing measures.

Intensifying Oil glut

Amidst worldwide lockdown, the appetite for the oil has vanished. Factories are shut, planes are grounded, and roads are empty. However, supply remains largely buoyant with the looming risk of the world running out of the capacity to store oil.

According to the International Energy Agency (IEA), global oil demand will fall by 9% in 2020 due to coronavirus lockdowns hindering attempts made by OPEC to restrict the supply glut of crude. While consumption is expected to plunge by 9 million barrels per day, the decade of demand growth will be lost in 2020.

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Saudi Arabia, Russia and all other exporters in Opec+ coalition announced that they would together rip output by just under 10 million barrels per day over the next 2 months. But the facilities to store the remaining surplus could be vanished by the middle of the year. Even US oil companies are planning to scale back production and spending

But, as per Goldman Sachs, 10 million bpd cut is too less to counter nearly 20 million bpd demand reduction this month and next.

China, South Korea, India and the US have offered their inventories to park unwanted barrels temporarily and are also considering refilling their own inventories since prices are low. This could amount to 200 million barrels eliminating 2 million a day over 3 months, as per IEA.

Nonetheless, this scenario will not last forever. Once the lockdown ends, people will get back to roads and airlines will get in the air boosting up the demand for fuel. However, the oil industry could be short on oil by that time as refineries across the world are being forced to halt operations.

Downward risks will persist with a likelihood of further modifications in demand and supply of oil during the second quarter of 2020. Markets will continue to check the track of coronavirus case and measures taken by various countries around the world.

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