OIL FUTURES: Crude rally on bullish economic news tempered by Beijing outbreak escalation

Houston — Crude futures settled higher June 16, although heightened coronavirus response measures in Beijing tempered earlier gains from bullish demand projections from the International Energy Agency and stronger-than-expected US retail sales data in May.

NYMEX July WTI settled up $1.26/b at $38.38/b while ICE August Brent rose $1.24 cents/b to $40.96/b, again crossing the $40/b threshold.

NYMEX WTI initially spiked by nearly $2/b, rising above $39/b after the IEA said it saw global demand growth of 5.7 million b/d next year, and revised its 2020 demand growth up by almost 500,000 b/d. Still, that left 2020 demand at a 8.1 million b/d deficit to 2019.

But the rally lost steam after Beijing raised its COVID-19 emergency response level and ordered schools closed.

Crude prices then began to rise again late in the trading day amid reassurances that China would handle pocketed COVID-19 outbreaks, and following heightened geopolitical tensions between China and India after at least 20 Indian soldiers were killed during a border skirmish.

"The Beijing school closures caught everyone off guard," said Edward Moya, senior market analyst with OANDA. "But I think financial markets are pretty confident China is likely to be successful in shutting down this virus."

However, Moya added, "Travel restrictions seem like they are just around the corner for Beijing and that will cast doubt that air travel demand will return strongly anytime soon."

In refined products, NYMEX July RBOB settled up 4.16 cents/gal at $1.2073/gal and July ULSD jumped 4.52 cents/gal to settle at $1.1822/gal.

Economic ties

Also bullish was news that US retail sales jumped by a record 17.7% in May from April. Still, May sales were down 6.1% versus May of 2019.

NYMEX WTI seems locked into the $35-40/b range for now and crude prices are connected more to broader economic data. And, despite Beijing concerns, energy markets have largely baked in some degree of a coronavirus second wave into prices, said Rystad Energy's head of oil markets, Bjornar Tonhaugen.

"Stability is good news," Tonhaugen said. "And today there is a positive vibe that, 'OK, we have already priced in our fear of the second wave. That's done. Now we need some positivity again.'"

US markets have been buoyed by the Federal Reserve's moves to act fast to counteract bearish news, including the June 15 news that the Fed will begin buying corporate bonds to help boost the coronavirus-stricken economy.

"It seems you can count on the US central bank to step in at the slightest hint of vulnerability in the market at the moment," said Craig Erlam, another senior market analyst with OANDA. "There's such a huge disconnect between the markets and economic reality. But, when so much cash is being thrown at the problem, what's to stop the rally continuing?"