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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.