Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Crude oil adjusting to weakening fundamentals
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil has traded lower during the past week with the correction in stocks and a stronger dollar driving an overdue realignment between the price and weakening fundamentals. The recovery in global fuel demand has stalled as a second virus wave continues to spread, especially in Europe and Asia, thereby raising doubts about the demand outlook at a time where additional barrels from OPEC+ have started to reach the market.
What is our trading focus?
OILUKNOV20 – Brent Crude Oil (November)
OILUSOCT20 – WTI Crude Oil (October)
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Crude oil remains under pressure from weaker fundamentals as the global energy demand recovery shows sign of stalling. Many countries around the world, especially in Europe and Asia are now in the midst of a second coronavirus wave. As a result the recovery in fuel demand has stalled with work-from-home and lack of leisure travel both signs that it will take longer than anticipated to get back to pre-virus levels of energy demand.
Data from the physical markets such as weaker time spreads as the spot price weakens faster than deferred months, weak refinery margins primarily due to an overhang of unwanted diesel and jet fuel, rising demand for tankers towards floating storage trades and reduced demand from China, the worlds biggest buyer, have for the past month increasingly been highlighting the risk of correction.
What it took was a deterioration in the overall risk appetite as seen through the correction in US (tech) stocks and the dollar being bought. In Brent crude oil, the break of the uptrend from June was the technical trigger which finally kicked of a move to bring price and fundamentals more in line.
We do not believe that we will see a new dramatic sell-off in crude oil but have to accept that the coronavirus and doubts about the timing of a vaccine may continue to delay until next year, the recovery back towards $50/b on Brent crude oil. The slow(ing) recovery in demand may challenge the unity of the OPEC+ group which in hindsight increased production before demand had recovered enough to absorb the additional barrels.
Brent has found support at its 100-day moving average at $39.50/b but with speculators only just having started to reduce bullish bets, the correction may take it down to towards $36.50/b before support can be established. The general level of risk appetite seen through stock market developments and the movement of the dollar will continue be key sources of inspiration for traders.
Fundamental oil market guidance will be provided by OPEC and the International Energy Agency when they publish their monthly oil market reports on September 14 and 15 respectively. The EIA released its Short Term Energy Outlook yesterday and while saying that US oil production will shrink by 860k b/d in 2020, they also highlighted the incredible difficulty in providing forward guidance given the continued uncertainty about the demand outlook.
Delayed by a day due to the Labor Day holiday on Monday, the Energy Information Administration will publish its “Weekly Petroleum Status Report” at 15:00 GMT. The report covering the week to September 4 will be less distorted than recent updates as the impact on production, refinery activity and trade from Hurricane Laura continues to fade.
Yesterday’s sharp rebound in crude oil was halted after the American Petroleum Institute said that US crude stocks rose by 3 million barrels last week. If confirmed by the EIA it will be the first rise in seven weeks. Occurring right at the end of the summer driving season may raise concerns about a renewed stock pile build on weaker than normal consumption due to Covid-19 and reduced demand from refineries entering maintenance.
As per usual I will publish the result of the report on my Twitter handle @Ole_S_Hansen
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