Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Summary: Crude oil and RBOB gasoline both trade close to a five-month high with the focus having moved from the pandemic impact on demand versus OPEC+ production cuts to the U.S. Gulf coast. Hurricane Laura look set to hit the U.S. coastline within the next 24 hours and the energy market nervously awaits the potential impact on refinery and other energy related assets.
What is our trading focus?
OILUKOCT20 – Brent Crude Oil (October)
OILUSOCT20 – WTI Crude Oil (October)
GASOLINEUSSEP20 - RBOB Gasoline (September)
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Crude oil and RBOB gasoline both trade close to a five-month high with the focus having moved from the pandemic impact on demand versus OPEC+ production cuts to the U.S. Gulf coast. Hurricane Laura which has been upgraded to a potential catastrophic category 4 storm, is due to slam into the Texas and Louisiana coastline within the next 24 hours. While she undoubtedly will cause a great deal of damage, energy prices have so far reacted calmly to these developments.
The Houston to Beaumont area holds a lot a refinery assets and during the past 24 hours the trajectory of the storm has moved further east which means that this, from an oil market prospective, important area will now be on the less violent left side of the hurricane.
According to reports more than 84% of oil output from the Gulf of Mexico has now been shut, while almost 3 million barrels/day of refinery capacity has been closed as well.
The temporary closure of refineries leading to less supply of products, together with potential storm and flood damage, has given gasoline prices an 8% boost since Friday. So far today, however the price trades down 1% after hitting $1.40/gal overnight before the changed trajectory helped attract some profit taking. The price rally has been cushioned by two Covid-19 related developments. US motorist are using 10% less gasoline than a year ago while inventories remain some 15 million barrels or 6.5% above the five-year average.
Depending on developments over the next 24 hours, a post hurricane round of profit taking could see the price retest the recent breakout zone just below $1.33/gal
WTI crude oil, up by less than 2% this week, has so far struggled to find a bid. While production from the Gulf of Mexico has been cut by more than 84% refinery demand has slumped by even more. With this in mind it is perhaps not that surprising to see WTI struggling to find a bid despite finally having broken above resistance at $43/b. So far the price has made it no further than $43.50/b, the early August high.
It highlights and in our opinion support the view that crude oil may struggle, at least in the short-term to rally much further. The pandemic is currently gathering momentum across Asia and Europe and while renewed lockdowns are unlikely, the impact on fuel demand is being felt. OPEC+ at the same time are struggling to reign in more than 2 million barrels/day from countries that have yet to reach agreed production targets.
A break below $43/b carries the risk of long liquidation taking the price lower towards $41/b and potentially as low as $38.5/b, the July 30 low.
Later today at 14:30 GMT the U.S. Energy Information Administration will release its ‘Weekly Petroleum Status Report’. A price supportive drop in both crude oil and gasoline stocks was reported by the American Petroleum Institute last night. But whether a confirmation from the EIA this afternoon will create additional market reaction remains doubtful given the current focus on Hurricane Laura and the discrepancies she will create in data over the coming weeks.
As per usual I will publish the results of the report on Twitter handle @Ole_S_Hansen