Crude oil remains under pressure from weaker fundamentals as the recovery in global energy demand continues to show signs of stalling. Many countries around the world, especially in Europe and Asia, are now in the midst of a second wave of coronavirus. As a result, the recovery in fuel demand has stalled with work-from-home and the lack of leisure and business travel - both signs that it will take longer than anticipated to get back to a pre-virus levels of energy demand.
During the period of sideways trading since June, data from the physical market had begun sending signals that the price and current fundamentals were moving out of sync. Among others, we have seen a rising contango with spot prices trading at a deepening discount to the next month(s) as storage tanks fill up in response to weak refinery margins, primarily due to an overhang of unwanted diesel and jet fuel. These developments have led to rising demand for tankers toward floating storage trades, while Saudi Arabia has reduced its official selling price for October as demand from key customers such as China begin to weaken.
What it took for the correction to occur was a deterioration in the overall risk appetite as seen through the correction in U.S. (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 off 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 slowing recovery in demand will challenge the resolve of the OPEC+ group which in hindsight increased production before demand had recovered enough to absorb the additional barrels.
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.
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 through stocks and the movement of the dollar will continue be a key source of inspiration for traders.