Grim outlook from US Fed chief spreads gloom to oil markets

Oil prices fell more than two percent on Wednesday despite the first decline in United States crude inventories since January, as markets were affected by a solemn address from the US Federal Reserve chairman warning that economic recovery from the coronavirus pandemic would take many months.

The markets have rallied in the last several days on optimism that fuel demand destruction has bottomed out, and producers have aggressively cut production to deal with the supply glut due to the pandemic. However, with governments signalling a long period before activity rebounds, risk assets like stocks and oil slipped on Wednesday.

Global benchmark Brent crude settled down 79 cents, or 2.6 percent at $29.19 a barrel, while US benchmark West Texas Intermediate (WTI) crude for June delivery settled down 49 cents, or 1.9 percent at $25.29 a barrel.

Federal Reserve Chair Jerome Powell gave a solemn assessment of the US economy and called for more government spending if that is what it takes to avoid “long-term economic damage” from the coronavirus pandemic. 

“There’s just a dark cloud because of that,” said Bob Yawger, director of energy futures at Mizuho Americas in New York. “It was such a negative speech it even eliminated what was easily the most bullish [weekly US oil inventory] report since January,” he said.

US crude stockpiles fell by 745,000 barrels last week, the US Energy Information Administration (EIA) said, compared with analysts’ expectations in a Reuters poll for a 4.1 million-barrel rise.

Stocks in the Cushing, Oklahoma, storage hub fell three million barrels, the EIA said, filling the delivery point for WTI to more than 80 percent of capacity as producers find themselves with fewer places to store oil.

Globally, fears of a slow recovery are overhanging the market.

“Fears are running rife that easing lockdown measures will trigger a second wave of coronavirus infections,” said Stephen Brennock at oil brokerage PVM.

US infectious disease expert Anthony Fauci on Tuesday told Congress that easing coronavirus lockdowns could set off new outbreaks of the COVID-19 disease that has killed 80,000 Americans and badly damaged the world’s biggest economy and oil consumer.

New outbreaks have been reported in South Korea and China, where the health crisis started before spreading across the globe, prompting governments to lock down billions of people, devastating economies and the demand for oil.

The EIA now expects world oil demand to fall by 8.1 million barrels per day (bpd) this year to 92.6 million bpd, compared with a previous forecast for a drop of 5.2 million bpd.

The statistical arm of the US Department of Energy also expects US output to fall by 540,000 bpd, against a previous forecast of 470,000 bpd. It expects global output of 11.7 million bpd this year and 10.9 million bpd in 2021.

The Organization of the Petroleum Exporting Countries (OPEC) also slashed its world oil demand forecast. The cartel now expects it to contract by 9.07 million bpd this year, it said in a monthly report. Last month, OPEC expected a contraction of 6.85 million bpd.

OPEC and other producers including Russia, a group known as OPEC+, are looking to maintain existing cuts beyond June, when the group meets next in Vienna, sources told Reuters news agency. 

OPEC+ agreed to cut output by 9.7 million bpd in May and June and to scale back cuts to 7.7 million bpd for the rest of the year.

Saudi Arabia’s cabinet has urged OPEC+ countries to reduce output further to restore balance in global crude markets, the country’s state news agency reported early on Wednesday.

Riyadh said it would add to planned cuts by reducing production by a further one million bpd next month, bringing output down to 7.5 million bpd.

“Suffice to say, the tug-of-war between OPEC-led cuts and virus anxieties will limit upside price potential,” PVM’s Brennock said.