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New York Open: Oil is the talk of the town

Market Analysis - Stephen Innes | 02 Apr 2020

Oil markets
 
Crude futures surged after President Trump expressed optimism that a damaging price war between Saudi Arabia and Russia can be resolved. And prices were fuelled further by headlines suggesting China is expected to buy oil for its state reserves.


According to the report, departments have been asked to quickly begin filling tanks, while using derivatives to lock in low prices. China is also planning to announce the fourth batch of strategic reserve sites.
 
Strategic reserve sites aside, as that is a bit of an unknown. A VLCC carries around two mn barrels of oil, so this reported SPR purchase by China is worth 8 to 10 supertankers. Given that oil storage is expected to brim by the end of May, adding an extra ten supertanker doesn't provide that much physical relief. But it does give a much-needed psychological lift, especially with backroom negotiations are expected to continue between the US -Saudi and Russia concerns.
 
Markets 
 
Stock markets are mostly trading higher after Oil stocks got a lift when  China said they would top up their SPR tanks. Still, the bounce might not stick as SPR purchases might only provide a modicum of relief for the oil complex since the capacity to warehouse oil cargos is probably not that great. 
 
While China's olive branch does shed some of the market excess baggage and temporarily pacifies a market problem child, still  the oil industry is in desperate need of a reconciliation between the feuding oil producers
 
Oil prices are up 10 % on the day and 20% from recent lows, and if oil prices do manage to stick amid all the intervention chatter, this would be very supportive and would be a much welcome relief to the broader markets
 
Currency markets 
 
Risk sentiment has improved over the past couple weeks, but of course, there are going to be some migraine headache type days. And yesterday was one of them, as risk-averse euro crosses got hit the hardest. The Euro will probably continue to struggle in the lockdown Europe scenario. But the long-term political impact is much tougher to gauge as anti-EU voices could potentially find support in these difficult times.
 
Gold Markets 
 
The gold market initially followed oil prices higher as higher oil is less deflationary and is thought to improve the gold outlook.  Even with the month-end behind us, and USD funding stress decreasing, the USD's safe-haven appeal continues to overwhelm the potentially negative impact of looser US monetary policy. As such, the resilient US dollar is not only competing for safe-haven flows but is tarnishing golds appeal

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