Head of Commodity Strategy
Summary: Crude oil slumped to a five-month low on Monday before surging by more than 12%. These developments which broke the relative calm seen since June had three major actors: Libya, Covid-19 and OPEC+. The renewed weakness was, just like April, driven by weakening demand and rising production before renewed focus on OPEC+ support helped arrest the slide.
What is our trading focus?
OILUKJAN21 – Brent Crude Oil (January)
OILUSDEC20 – WTI Crude Oil (December)
XLE:arcx - Energy Select Sector SPDR Fund
XOP:arcx - SPDR S&P Oil & Gas Exploration and Production
XES:arcx - SPDR S&P Oil & Gas Equipment & Services
____________________________________________________________________________________________________
Crude oil slumped to a five-month low on Monday before surging by more than 12%. These developments which has broken the relative calm seen since June had three major actors: Libya, Covid-19 and OPEC+. The renewed weakness was, just like April, driven by weakening demand and rising production before renewed focus on OPEC+ support helped arrest the slide.
A wave of new virus-lockdown measures in Europe and a rapid rise in new cases across the U.S. have raised concerns about the near-term trajectory for oil demand. At the same time and potentially more troubling for OPEC+ has been the rapid recovery in Libyan oil production from less than 100,000 barrels/day in September to the current 800,000 barrels/day.
These developments have in our opinion sharply reduced the likelihood of OPEC+ going through with the agreed 1.9 million barrels/day production increase from January. The rally since yesterday was in fact triggered by reports that the Russian oil minister was discussing a delay with local producers. Something we think is close to an absolute given considering the recent deterioration in the short-term fundamental outlook.
Adding to the pressure on the price and OPEC+ has been U.S. production which after a very active and disruptive hurricane season have proven quite robust and despite sub-$50 prices have started to recover. Adding to this emerging signs that the strong demand from China that helped speed up the rebalancing process in recent months has started to fade.
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.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
