Market Outlook: European equities rally, Oil gaps lower as OPEC meeting delayed

Global stocks are supported by signs of progress against the coronavirus, with investor sentiment apparently boosted by evidence that lockdowns are working. The swifter the lockdowns work and flatten the curve, the quicker we get back to normal, or at least some semblance thereof. Italy has recorded its lowest daily death toll since the middle of March. Key questions remain unanswered of course: how long does the economic collapse persist, and to what extent stimulus efforts actually work? Japan, which has been slow to test, is set to declare a state of emergency.

Markets are starting to shrug off any weak data as it only confirms what is already discounted by investors in the short term. UK consumer confidence cratered to -34 from -7, a plunge not seen since the financial crisis.

The Eurozone construction PMI fell to 33.5 from 52.5, coming off the back of Friday’s horror show for Services. The IHS Markit Eurozone PMI slumped to a worst-ever reading of 26.4 in March. Italy’s services PMI fell to 17.4! Friday’s US nonfarm payrolls showed a decline of -701,000 jobs, before the worst of the lockdown hit. In the last fortnight we know some 10m Americans have filed for unemployment insurance, so the NFP is very much telling us what we already know. 

Hopes OPEC and allies can agree to production curbs sent oil flying last week, but gapped lower when it opened in Asia today, although we have seen crude prices recover through the session to trim losses.

Oil gapped 11 per cent lower with WTI at $25.56 but has pared the losses overnight to trade around $28 as we saw risk find bid in Asia and then had the usual rumours about OPEC and Russia being ‘close to a deal’. The OPEC+ meeting scheduled for today has been pushed back to Thursday, amid a spat between Russia and Saudi Arabia over the weekend, but clearly there is still hope that the cartel and allies can agree to cutting production. Hope endures for now but it’s going to be very hard to agree on cuts that move the market sufficiently. Platts Analytics sees Brent in the $10-$20/barrel range in April and May, against the $33 currently trading.

The infamous March meeting between OEPC and Russia had 1.5m bpd of cuts on the table to be reviewed in June. That reduction was to be split 1m for OPEC members and 500k for non-OPEC. Whilst clearly the collapse in prices has rattled energy ministries, the idea of now agreeing to a curbs x7 as large seems far-fetched.

1. Supply is only one side of the equation. The IEA pointed out on Friday that even an unprecedented inventory build. If OPEC and allies agreed to 10m bpd in cuts – 10% of global supply – inventories would still rise by 10-15m bpd in Q2. Even an historic 10m cut would be insufficient.
2. This is a standoff and neither side wants to put down their gun first. The Saudis seem to be in this for the long haul and are best able to weather the storm. Production is going to need to be cut, but it’s the how and when that will matter for prices in the near-term. Prices may need to hit $10 for supply destruction to catch up with demand destruction.

 The 1hr chart highlights the extent of the damage. And for all the harping on about biggest ever percentage gains for oil, the only reason we get those kind of moves is because prices are so low. It’s rather like Dow points.

Daily shows the MACD crossover offering a classic buy signal last week, which I tweeted about. But it’s been very choppy and will remain so. 

Neil Wilson is chief markets analyst at Markets.com