Black Friday for the Black Gold amid Omicron variant uncertainty

Posted on November 29, 2021November 29, 2021 by Vrasidas Neofytou

It was a Black Friday for the Black Gold since the prices of both WTI and Brent crude contracts lost nearly $10/b last Friday, plunging by over 12% amid concerns that the new highly mutated covid variant of Covid-19 with the name “Omicron” might dampen global economic growth and trigger a new wave of fuel demand destruction just as OPEC supply increases.

Crude oil carnage:

Crude oil prices experienced one of their worst trading days this year on Friday, plunging by more than 12%, with the U.S.-based WTI crude falling to as low as $67,50/b, while the international benchmark Brent crude settled below $73/b for the first time since early September.

WTI crude, Daily chart

Both crude contracts registered their fifth straight week of losses for the longest weekly losing streak since March 2020, while their prices are now down nearly $15 since October highs.

Energy investors pushed lower the oil prices since the potential new lockdowns and travel restrictions could hit demand for petroleum products, especially for gasoline and jet fuels, like what happened in March 2020 when the fuel demand collapsed.

It’s worth to be mentioned that the Omicron variant managed to do more what U.S. President Joe Biden couldn’t with the release of 50 million barrels of oil from the SPR- Strategic Petroleum Reserve, crashing the oil prices on global demand concerns.

The SPR release was part of a coordinated global effort by major energy-consuming nations such as India, China, Japan, South Korea, and the U.K to slowdown 2021′s rapid rise in crude oil prices by releasing some million barrels from their strategic oil reserves.

The new Omicron variant caused Black Friday’s plunge:

Crude oil together with the other risk-sensitive financial assets dropped sharply last Friday, following the unexpected news about the newly discovered Covid-19 variant named from the Greek letter “Omicron”.

The broad market sell-off was triggered after W.H.O-World Health Organization officials on Thursday warned of a new Covid-19 variant that’s been detected in South Africa, containing more than 30 mutations to the spike protein, the component of the virus that attaches to cells, than the highly contagious Delta variant (10).

Because of the high number of mutations, scientists fear it could have increased resistance to vaccines, though WHO said further investigation is needed.

Many countries have already announced tighter social and mobility measures, while some others have banned flights and travellers from six countries in Southern Africa since they have reported many cases during the weekend.

Market reaction on Omicron variant:

Omicron variant rocked the global financial markets on Friday, with the industrial Dow Jones index dropping 1,000 points, or nearly 3%, posting its worst day of the year, while the European and Asian-Pacific markets plummeted also 3%, led by energy, banks, travel, and leisure stocks.

On the flip side, investors searched for safety into traditional havens such as Treasuries, Gold, Japanese Yen, and Swiss Franc, while some others moved funds into companies that they will be the stay-at-home winners in case of renewed lockdowns such as Netflix, Peloton, Zoom Communications, and into vaccine makers Moderna, and BioNTech which jumped by more than 20%.

WTI and Brent prices rebound on Monday ahead of OPEC+ meeting:

Crude oil prices rebounded on Monday, with WTI and Brent’s contracts spiking as much as 6% to $71/b and $76/b respectively, recovering more than half of Friday’s steep losses.

The rebound was due to the belief that the Omicron variant is unlikely to be more malicious and that the existing vaccines will most likely continue to be effective in preventing hospitalizations and deaths.

Many energy traders believe that Friday’s sell-off was exaggerated, focusing on the coming OPEC+ meeting on December 02, where the group will decide on production policy for January.

At present, the alliance, known as OPEC+, has been returning 400,000 barrels per day to the market each month as it unwinds the historic production cuts it implemented in April 2020 as the pandemic sapped demand for petroleum products.

Why is consumer sentiment falling like a rock?

Posted on November 26, 2021 by George Kessarios

If one looks at consumer sentiment vs the major US indices over a very long period of time, they will notice that they are correlated. That is until recently. The chart below depicts divergence unlike anything we have seen before.

As is clear from the chart, consumer sentiment has dropped like a rock while the Wilshire total market cap index is at a record high.

So, the question is, who is wrong? Are consumers wrong and sentiment will soon come back with a roar to coincide with the market? Or will US markets correct to come to terms with consumer sentiment?

Sentiment should be higher today if one takes into consideration the low unemployment rate, voluntary job quits, high savings and record consumer net worth. All these should have reflected a much rosier sentiment picture, but they haven’t.

The bottom line is that many strange things have happened during this economic cycle. The divergence we are seeing in consumer sentiment vs the market is one of them. Whether this divergence means anything insofar as markets are concerned is unclear. At least for now markets are shrugging it off. Nevertheless, it is an interesting revelation and something to keep an eye on.

U.S. dollar rises, Euro drops to $1,12 as Covid cases soar

Posted on November 25, 2021 by Vrasidas Neofytou

Growth-related currencies have been suffering significant losses from the growing anxiety over the impact of surging Covid cases around the world, while the safe-haven currencies extend their gains on lower risk appetite and higher inflation rates.

Euro has been under pressure since the beginning of November, falling to as low as 1,12 to the dollar, as investors are concerned for the possible renewed lockdowns in Europe as COVID cases surged again.

Commodity-linked currencies Canadian and Australian dollars have been falling along with crude oil and industrial metal prices, while the British Pound remains depressed on Brexit worries.

Safe-haven currencies U.S dollar, Japanese Yen, and Swiss Franc have also benefited from the risk aversion sentiment across the board, as the soaring virus cases deteriorate the global economic outlook for the last quarter of the year.

The DXY dollar index, which measures the currency against a basket of six peers, broke above 96 level for the first time since July 2020, getting support from the hawkish Federal Reserve, the surging bond yields, and the stronger-than-expected U.S. economic data.

EUR/USD breaks below $1,12 on FED-ECB monetary policy divergence

Posted on November 25, 2021November 25, 2021 by Vrasidas Neofytou

The common currency has dropped below $1,12 for the first time since July 2020, following the monetary divergence between the Fed and ECB, the gloomy economic outlook in Germany, the worsening Europe Covid-19 situation, and the surging U.S. dollar and Treasury yields.

The EUR/USD pair has been following a downward trajectory since the half of the year, falling from the yearly highs of $1,23 to $1,12 as the monetary policy divergence between the Federal Reserve and the European Central Bank amid surging inflation favouring the greenback over the Euro.

Gloomy German economic outlook:

EUR/USD pair fell to as low as $1,118 yesterday after German business sentiment data for November was 96,5 vs 96,6 market expectations, falling for a fifth straight month amid supply disruptions in manufacturing and surging Covid cases and deaths in the country, increasing the concerns for the outlook of the largest economy in the Eurozone.

EUR/USD pair, Weekly chart

Traders turned sellers on the common currency on growing worries over the impact of surging Covid-19 cases in Europe, with Austria reimposing a full lockdown on Monday, while some other countries such as Germany, Netherlands, Ireland, and Greece have reintroduced stricter measures to tackle rising infections.

Dovish ECB:

European Central Bank President Christine Lagarde has reiterated many times that the bank will stick to its supporting ultra-easing monetary policies despite the surging inflation rates in Eurozone amid higher energy prices and supply disruptions.

Lagarde repeated that conditions for a rate hike in 2022 are “very unlikely” to be met but said she could not make a similar commitment for the following year.

Furthermore, the traders await the release of the minutes from the European Central Bank’s Oct. 28 meeting later today, looking for any comments about inflation, the Eurozone’s financial conditions, and rate hikes.

Hawkish Fed pressures EUR/USD pair:

The U.S. dollar has been in an upward bullish momentum since summer as investors are pricing in the scenario for one or two rate hikes by Federal Reserve in 2022 together with the speed up of the elimination of the Fed’s bond-buying program.

The DXY index which measures the U.S. dollar against six major peers, climbed to near 97 yesterday, hitting its highest level in 17 months, supported by the hawkish Fed and the soaring 10-year Treasury yields that topped 1,70% level.

DXY-U.S. dollar index, Weekly chart

Forex traders have become bullish on the greenback as they believe that Fed will start hiking rates more quickly in States than in other major economies such as the EU and Japan.

On top of that, minutes released yesterday from the U.S. Federal Reserve’s November meeting showed that many central bankers have expressed concerns over surging inflation, and they are willing to speed up the taper of their $120b per month bond-buying program and move more quickly to raise interest rates if inflation remains high.

Hence, the dollar is getting stronger following the better-than-expected economic data in the country. The U.S. weekly jobless claims fell to a 52-year low yesterday, the consumer spending is soaring, and the Q3 GDP growth has been revised higher.

Finally, the dollar got additional support after U.S. President Joe Biden renominated Jerome Powell for a second term as Fed chair and named Fed Governor Lael Brainard as vice-chair.

WTI oil falls to $75/b on Covid-led demand concerns and SPR releases

Posted on November 23, 2021 by Vrasidas Neofytou

WTI crude price falls to as low as $75/b, Brent crude breaks below $80/b on Tuesday afternoon, hitting their lowest level since October; as energy traders worry that the new Covid-led lockdowns could slow down the demand growth for petroleum products coupled with the news that the U.S. administration will tap the Strategic Petroleum Reserve.

WTI crude oil contract, Daily chart

Both WTI and Brent have fallen by more than 10% from their multi-year highs, and they are on track for a fifth straight week of losses, which is the longest weekly losing streak since March 2020.

The U.S will release oil from SPR-Strategic Petroleum Reserve:

U.S. President Joe Biden announced today that the administration will release 50 million barrels in total from the Strategic Petroleum Reserve as part of a global coordinated effort with other net importers and energy-consuming nations such as India, China, Japan, Republic of Korea, and the United Kingdom to calm 2021′s rapid rise in gasoline prices.

The administration will sell 18 million barrels and loan the other 32 million barrels (to be returned later), to provide relief on the gas prices and to address the lack of additional supply from the OPEC+ alliance, the higher fuel demand, and the weather-led production disruptions.

The US presidential administration was exploring options to put downward pressure on the surging petroleum prices and especially the gasoline prices at the fuel pump, which climbed to a 7-year high.

One of the options for the administration was to tap the Strategic Petroleum Reserve which was founded in 1975 after the Arab Oil Embargo, with a max capacity of 727 million barrels in store, and the other to convince the OPEC+ alliance to increase the production, which was not accepted from the group.

Crude oil has been under pressure after the surging Covid cases in Europe:

The growth-related crude oil market has been under pressure since last week as investors worry over the impact of surging Covid-19 infections in fuel demand in Europe, which has again become the epicentre of the pandemic, accounting for half of global cases and deaths.

Austria becomes the first country in Europe to reimpose a full Covid-19 lockdown from Monday, its fourth lockdown since the start of the pandemic last year.

The fourth wave of infections has also plunged next-door Germany, Europe’s largest industrial economy, into a national emergency, with local authorities already shutting Christmas markets, bars, cafes, and theatres.

Covid-led lockdowns reduce demand for petroleum products since people aren’t moving around or travelling, businesses and stores are closed.

If the strict measures extend beyond Austria to other parts of Europe or elsewhere, it could be a bearish catalyst for the already inflated WTI and Brent crude oil prices.

Belarus threatens to shut EU gas flow amid border crisis with Poland

Posted on November 18, 2021 by Vrasidas Neofytou

The isolated and authoritarian Belarusian President Alexander Lukashenko has threatened Europe to close the taps of a key Russian natural gas pipeline crossing his country, as a retaliation against any new EU or U.S. sanctions following the escalation of a border migration-led crisis with Poland and EU.

Market Reaction:

Energy traders pushed higher the European gas and power prices following Lukashenko’s threat to cut gas deliveries to the continent since Europe has been already facing a shortage of Russian gas supplies.

The Dutch Title Transfer Facility (TTF), the European benchmark gas futures price, for December delivery rebounded from the monthly low of €65 per megawatt-hour (Mwh) to €80/Mwh after the threat.

The rally in European gas price lifted the price of LNG in Asia as well amid undersupplied conditions and robust global demand ahead of the winter months in North Hemisphere.

The Platts Japan-Korea-Marker (JKM) – the benchmark for spot LNG in Asia – for delivery in December rallied to as high as $38 per Million British thermal unit (MMBtu), up from $30/MMBtu at the beginning of last week.

What is the Yamal-Europe gas pipeline?

The 4,107km-long Yamal-Europe gas pipeline is owned by Russia’s state gas company Gazprom, and it is a natural gas distribution system that is running across four countries including Russia, Belarus, Poland, and Germany.

The pipeline, which was constructed in 2006, has been a key supply route since it can carry 33 billion cubic metres a year or about 20% of Russian natural gas flows to Europe.

EU accused Belarus of weaponizing migration:

Tensions between the EU and Belarus have been escalating in recent months, with the EU accusing Russia-backed Lukashenko of intentionally sending thousands of migrants over the borders of Poland and Lithuania in response to sanctions imposed by the EU.

The most recent conflicts are taking place in Polish borders when local police and soldiers block thousands of migrants mostly from countries of Africa, the Middle East, and Central Asia such as Syria, Afghanistan to cross towards the EU.

The EU, which has repeatedly sanctioned Belarus for human rights abuses, accuses Minsk of luring migrants from war-torn and poor countries and then pushing them to cross into Poland to try to spread violent chaos on the EU’s eastern border.

New sanctions:

The bloc’s 27 ambassadors agreed this constituted a legal basis for further sanctions, which could come as early as next week and target some 30 individuals and entities including the Belarusian foreign minister and the national airline who facilitate human trafficking towards Minsk and then the EU-Belarus border.

Putin- Lukashenko stance:

Lukashenko and Russian President Vladimir Putin have blamed the EU for imposing sanctions in Belarus over the migration crisis, accusing them of failing to live up to their humanitarian ideals and trying to press Belarus with plans to close part of the frontier.

Russia took the rare step of dispatching two nuclear-capable strategic Tupolev Tu-22M3 bombers to patrol Belarusian airspace in a show of support for its close ally last week.

Analysts expect that any new sanction will drive Belarus further into isolation, leaving Putin and Russia as Lukashenko’s only real lifeline.