Oil left joyless on Good Friday as Mexico waves off OPEC+ deal

By Han Tan

Market Analyst at FXTM

At the time of writing this note on Friday Brent had fallen by 4.1 percent and was struggling to keep its head above the psychological $30 level, while WTI edged closer to the $20 line plunging 9.3 per cent, as markets expressed their misgivings over the tentative OPEC+ deal to cut supply by 10 million barrels per day (b/d) over the next two months. Such cuts are also conditioned on Mexico following suit, but it has refused outright to comply with the proposed reduction to its production levels.

Even if Mexico were to perform an about-turn and agree to lower its production by the prescribed 400,000 b/d, the 10+ million b/d reduction in global supplies won’t be enough to fully offset the huge drop in demand, which is estimated to be more than 30 million b/d.

Price action in the oil markets indicates that hope is diminishing over the collective ability of the major producing nations to trigger a meaningful supply-side intervention over the near-term. The case for a forceful attempt to rebalance global oil markets remains as strong as ever, at a time when demand has been left decimated by the coronavirus. Unless there are coordinated supply cuts on a global scale, oil prices will be left subject to demand-side woes with declines likelier than gains in the interim and an inevitable drop to test the recent 18-year lows.

Markets lackluster ahead of looming tests to risk appetite

The upward momentum seen in US stocks, enjoying their best week since 1974, failed to carry over into Asian markets as regional indexes were mixed amid subdued market activity on Good Friday. The easing US dollar is alleviating the recent pressure on Asian currencies and gold, with the latter climbing towards the psychological level of $1700.

Global investors are still weighing up signs of economic turmoil against the support measures rolled out across major economies. News of the Fed’s latest round of emergency aid worth $2.3 trillion, along with Europe’s proposed $590 billion economic rescue package, may still tide over risk assets into this week. However, the recent gains in US stocks are set to be tested when earnings season kicks off on Tuesday. Dire warnings of Wall Street’s earnings outlook could ultimately prove the unravelling of the stock market’s nascent bull run.

The staggering buildup in US jobless claims, now numbering 16.8 million in the past three weeks, is a stark reminder to the markets that at least from an economic perspective, things are set to get worse before they get better. The week’s data releases of US retail sales, manufacturing and especially the weekly jobless claims could hold significant sway over broader risk sentiment amid despairing questions over the depth and breadth of the economic fallout due to Covid-19.