Oil looks to OPEC+ for support as outlook deteriorates

Brent crude oil which has traded sideways since June, broke lower last week as the fundamental outlook continued to deteriorate. Crude oil and commodities in general do not like equities have the luxury of being able to roll forward expectations as supply and demand need to balance every day. With oil in particularly this means that once it is out of the ground, it needs to be stored or consumed. If storage builds to rapid, the price may suffer, especially at the front end of the curve in order to attract interest for storage plays from owners of ships and landlocked storage facilities.

We are, however very unlikely to witness a renewed collapse in crude oil prices similar to what we saw back in April. Asian demand remains robust while fuel demand in the U.S. is unlikely to be hurt too much due to the lack of appetite for lockdowns.

With this in mind we suspect that Brent crude oil may continue to trade rangebound with a slightly negative bias. The current range is $35.50/b to $42.50/b with the cure being either additional action from OPEC+ or news about the rollout of a vaccine.

Looking beyond the current and somewhat challenging outlook are the prospect of a future recovery. Once the current overhang of spare capacity has been reduced and demand return to trend-growth above 100 million barrels/day, the lack of investments from oil producers will likely lead a strong rebound in prices. Once the market begins to balance the ten oil majors (ex. Aramco) and ten biggest U.S. independent producers may start to claw back some of the near $800 billion in market cap they have lost this year.

While the S&P 500 trades higher by a few percent year-to-date some of the major energy related ETF’s have shed more than 50% of their value. It highlights a sector not only challenged by lower oil prices but also the rush into “green” investments at the expense of traditional energy providers.

While investors seek green investments they ignore the fact that fossil fuels, like it or not, will remain a key source of energy for decades to come. Lack of current investments into the sector therefore risk driving prices of fuel beyond higher beyond 2021 at a time where the global economy can least afford it.