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Flight to Safety as Variant Fears Soar

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

Risk assets are getting pummelled at the end of the week as a new Covid variant sparks fears of new restrictions and lockdowns.

The most worrying thing about the new strain at the moment is how little we know about it, with early indications being that it could be more problematic than delta. The biggest fear is that it will be resistant to vaccines and be a massive setback for countries that have reaped the benefits from their rollouts.

We’ll no doubt learn more in the days and weeks ahead but for now, fear of the unknown will weigh heavily going into the weekend and could carry over into next week. We’re seeing a typical flight to safety in the markets with equities, commodity currencies and oil getting whacked and traditional safe havens like bonds, gold, the yen and swissy getting plenty of love.

In times like this, we get a true sense of what investors consider to be real, reliable safe-havens. And bitcoin is off 8% today which has delivered a fatal blow to its safe-haven credentials, putting an end to another crypto myth that has surfaced over the years despite there being zero evidence to back it up. Maybe one day investors will have a different opinion but right now, when their cash is at stake, they’re sticking with safe-haven assets with a track record, as they should.

Pfizer has sought to calm nerves, stating that should a vaccine-escape variant emerge, it could produce a tailor-made vaccine in about 100 days. Three months can feel like a long time but when compared to where we were 18 months ago, that is very reassuring as a worst-case. It may not be quick enough to prevent more restrictions this winter though.

Erdogan standing firm on interest rates

Turkish President Erdogan is successfully talking down the lira once again, claiming there’s no turning back from the new economy program and that interest rates will decline. It’s incredible to see a President have such disregard for something that will have such a huge impact on so many people. It’s like he’s playing with the markets to see what he can get away with. In a sign of Erdoganomics fatigue, the currency has quickly recouped the more than 2% losses it incurred immediately following the comments. A sign that these antics are now expected and priced in, it seems.

Oil slides on variant concerns

Oil is among the assets taking a heavy beating on the variant news today, falling more than 5% as traders fret about the impact on restrictions and behaviour this winter. Even without severe restrictions, people will adopt more caution which will weigh on demand, as OPEC+ has repeatedly stated and factored into their models.

It seems the US and other consuming countries have played their hand too soon. Sure, Biden will score some political points ahead of the midterms as voters see prices at the pump fall, which was ultimately the goal. But should prices spike again early next year, what then?

Crude is back at levels last seen at the start of October and if this risk aversion continues in the weeks ahead, there’s plenty of room to fall. While OPEC+ would likely have avoided altering production plans next week or in the months following in response to the SPR releases, it may soon feel its hand is being forced. Next week may come too soon but another major outbreak could see them slam on the brakes.

Gold jumps on safe-haven appeal

Times like this are when gold shines and we’re seeing investors flock back to an old reliable friend today. It has pulled a little off its highs after hitting $1,815 earlier in the session but it remains above $1,800 at the time of writing. It’s an interesting one for gold and bonds, as the situation now is very different from last year.

Central banks can’t just turn on the taps again with a “whatever it takes” avalanche of cheap cash as they have before. Inflation is a real problem and lockdowns will exacerbate the problem. Sure, they may be a little more patient and hold off on raising rates next month in the case of some or accelerating tapering in the case of the Fed, but they can hardly ramp up their stimulus measures in any considerable way. Their hands are tied.

This should still be bullish for gold as, at the very least, central banks will delay tightening until they have a better idea of the risks to the economy. Allowing inflation to run hot unaddressed could increase the hedge appeal of gold again, particularly in these uncertain times.

Bitcoin remains a speculative risk asset, for now

In recent weeks we’ve seen that, in times of real uncertainty, bitcoin has not done well as an inflation hedge or a safe haven asset. There’s no doubt it’s a fascinating tradable instrument and a highly speculative one, but it’s quite clear now that it’s a risk asset and nothing more. Not at the moment anyway. Who knows what the future holds.

It’s taking a real beating today, off around 8% and looking vulnerable. Key support around $55,500 has fallen which will now draw attention back to $50,000. I’m sure soon enough the eternal crypto bulls will pile back in and smell a bargain but as we’ve seen so often in the past, bitcoin is capable of enormous gains and eye-watering corrections.

If this new variant triggers major risk aversion in the markets, it could come under serious pressure. Unless of course, the inflation narrative catches again. No sign of it yet but, as ever with crypto, it has an incredible ability to find the bullish case in anything. Maybe this will be next.

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Crude Oil

Nigeria Pumps 236.2 Million Barrels in First Half of 2024

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Nigeria pumped 236.2 million barrels of crude oil in the first half of 2024, according to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC).

This figure represents an increase from the 219.5 million barrels produced during the same period in 2023.

In January, Nigeria produced 44.2 million barrels of crude oil while February saw a slight dip to 38.3 million barrels, with March following closely at 38.1 million barrels.

April and May production stood at 38.4 million barrels and 38.8 million barrels, respectively. June’s output remained consistent at 38.3 million barrels, demonstrating a stable production trend.

Despite the overall increase compared to 2023, the 2024 production figures still fall short of the 302.42 million barrels produced in the same period in 2020.

This ongoing fluctuation underscores the challenges facing Nigeria’s oil sector, which has experienced varying production levels over recent years.

On a daily basis, Nigeria’s crude oil production showed some variability. In January, the average daily production peaked at 1.43 million barrels per day (mbpd), the highest within the six-month period.

February’s production dropped to 1.32 mbpd, with a further decrease to 1.23 mbpd in March. April saw a modest increase to 1.28 mbpd, which then fell again to 1.25 mbpd in May. June ended on a positive note with a slight rise to 1.28 mbpd.

The fluctuations in daily production rates have prompted government and industry leaders to address underlying issues.

Mele Kyari, Group Chief Executive Officer of the Nigerian National Petroleum Company Limited (NNPC), has highlighted the detrimental effects of oil theft and vandalism on Nigeria’s production capabilities.

Kyari emphasized that addressing these security challenges is critical to boosting production and attracting investment.

Kyari also noted recent efforts to combat illegal activities, including the removal of over 5,800 illegal connections from pipelines and dismantling more than 6,000 illegal refineries.

He expressed confidence that these measures, combined with ongoing policy reforms, would support Nigeria’s goal of increasing daily production to two million barrels.

The Nigerian government remains focused on stabilizing and enhancing oil production. With recent efforts showing promising results, there is cautious optimism that Nigeria will achieve its production targets.

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Crude Oil

Oil Prices Steady Amid Mixed Signals on Crude Demand

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Oil prices remained stable on Thursday as investors navigated conflicting signals regarding crude demand.

Brent crude oil, against which Nigerian oil is priced, settled at $85.11 a barrel, edging up by 3 cents, while U.S. West Texas Intermediate (WTI) crude dipped by 3 cents to $82.82 a barrel.

The stability comes as the U.S. economy shows signs of slowing, with unemployment benefit applications rising more than expected.

Initial claims increased by 20,000 to a seasonally adjusted 243,000 for the week ending July 1, prompting speculation that the Federal Reserve might cut interest rates sooner than anticipated. Lower rates could boost spending on oil, creating a bullish outlook for demand.

Fed officials suggested that improved inflation and a balanced labor market might lead to rate cuts, possibly by September.

“Healthy expectations of a Fed rate cut in the not-so-distant future will limit downside,” noted Tamas Varga of oil broker PVM.

However, rising jobless claims signal potential economic easing, which could dampen crude demand.

John Kilduff of Again Capital highlighted the impact of a slowing economy on oil consumption despite a significant drop in U.S. crude inventories last week.

Global factors also weighed on the market. China’s economic policies remain steady, though details are sparse, affecting investor sentiment in the world’s largest crude importer.

Meanwhile, the European Central Bank maintained interest rates, citing persistent inflation.

An upcoming OPEC+ meeting in August is expected to assess market conditions without altering output policy, according to sources. This meeting will serve as a “pulse check” for market health.

Overall, oil prices are caught between economic concerns and hopes of a rate cut, maintaining a delicate balance.

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Crude Oil

Oil Prices Slide on China Demand Concerns, Brent Falls to $83.73

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Oil prices declined on Tuesday for the third consecutive day on growing concerns over a slowing Chinese economy and its impact on global oil demand.

Brent crude oil, against which Nigerian oil is priced, dipped by $1.12, or 1.3% at $83.73 a barrel, while U.S. West Texas Intermediate (WTI) crude dropped $1.15, or 1.4%, to close at $80.76.

The dip in oil prices is largely attributed to disappointing economic data from China, the world’s second-largest economy.

Official figures revealed a 4.7% growth in China’s GDP for the April-June period, the slowest since the first quarter of 2023, and below the forecasted 5.1% growth expected in a Reuters poll.

This slowdown was compounded by a protracted property downturn and widespread job insecurity, which have dampened fuel demand and led many Chinese refineries to cut back on production.

“Weaker economic data continues to flow from China as continued government support programs have been disappointing,” said Dennis Kissler, Senior Vice President of Trading at BOK Financial. “Many of China’s refineries are cutting back on weaker fuel demand.”

Despite the bearish sentiment from China, there is a growing consensus among market participants that the U.S. Federal Reserve could begin cutting its key interest rates as soon as September.

This speculation has helped stem the decline in oil prices, as lower interest rates reduce the cost of borrowing, potentially boosting economic activity and oil demand.

Federal Reserve Chair Jerome Powell noted on Monday that the three U.S. inflation readings over the second quarter “add somewhat to confidence” that the pace of price increases is returning to the central bank’s target in a sustainable fashion.

This has led market participants to believe that a turn to interest rate cuts may be imminent.

Also, U.S. crude oil inventories provided a silver lining for the oil market. According to market sources citing American Petroleum Institute figures, U.S. crude oil inventories fell by 4.4 million barrels last week.

This was a much steeper drop than the 33,000 barrels decline that was anticipated, indicating strong domestic demand.

The International Monetary Fund (IMF) also weighed in, suggesting that while the global economy is set for modest growth over the next two years, risks remain.

The IMF noted cooling activity in the U.S., a bottoming-out in Europe, and stronger consumption and exports for China as key factors in the global economic landscape.

In summary, while oil prices are currently pressured by concerns over China’s economic slowdown, the potential for U.S. interest rate cuts and stronger domestic demand for crude are providing some support.

Market watchers will continue to monitor economic indicators and inventory levels closely as they gauge the future direction of oil prices.

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