Crude oil frets possible OPEC discord
Head of Commodity Strategy
Summary: The impressive November rally in crude oil, fuel products and oil producers on vaccine optimism has grinded to a halt. A surprise discord between Saudi Arabia and the U.A.E. raising the stakes ahead of Thursday's delayed OPEC+ meeting. Failure to postpone the precious agreed January production hike risks sending oil lower to challenge recently established long positions. This given the current mismatch between weak Covid-19 related fuel demand and the market increasingly having started, perhaps prematurely, to price in an expected strong recovery in 2021.
What is our trading focus?
OILUKFEB21 – Brent Crude Oil (February)
OILUSJAN21 – WTI Crude Oil (January)
The impressive November rally in crude oil, fuel products and oil producers on vaccine optimism has hit a stumbling block given the potential risk of OPEC+ failing to curb production for a few more months. The vaccine news last month helped drive a +20% rally in crude oil and +40% in some oil company stocks on the assumption that a brighter demand future awaits in 2021. With lockdowns and reduced mobility being replaced by surging demand from returning commuters together with renewed demand for holidays and business travels.
OPEC met on Monday and following a long meeting it was clear that the group struggled to find common ground in how to deal with a short term troubling demand outlook and the expected pickup next year. Given continued lockdowns and reduced mobility in Europe and the U.S., the market was expecting OPEC+ would rollover the current agreement and postpone the planned 1.9 million barrels/day production hike by a few more months.
Surprisingly this time, it was not a discord between Russia and Saudi Arabia that prevented the group from reaching a clear agreement on whether to delay the planned production increase. Instead a perhaps more dangerous divide, from an OPEC stability perspective, has emerged between Saudi Arabia and the U.A.E., two GCC countries that normally speak with one voice.
Without ruling out a price supportive delay, the U.A.E. Energy Minister has insisted on bigger compliance and speedy implementation from overproducing countries. Failure to reach an agreement could send crude oil lower by several dollars, thereby risking a snowballing effect of long liquidation from speculators who recently bought more than 180 million barrels.
We maintain the view that cracks will be repaired as anything but an agreement to postpone would be a massive own goal. With the expected pickup in fuel demand - once the Covid-19 cloud lifts - being just a few months away, the risk of sending prices lower just before the finish line makes little sense.
That aside, the current risk reward in crude oil following the November surge, is now potentially slightly skewed to the downside as the market may struggle to find more value in a Brent price approaching $50/b in a not yet balanced market.
Also as the vaccine optimism begin to be fully priced in some nervousness may start to emerge with regards to just how strong the anticipated demand pick up will be. While Asia, led by China, is already firing on all cylinders, the outlook for the rest of the world looks a bit more challenging. Two recent headlines from the Wall Street Journal highlight the potential challenges that lie ahead.
According to airline experts, between 19% and 36% of all business trips could disappear, given efficiencies developed during the lockdown and the cost saving nature of avoiding sending representatives around the world. At the same time, the work-from-home culture has increasingly been adapted by companies and workers around the world. Companies not experiencing any loss of productivity are likely to support this new culture as it reduces cost while improving workers quality of life, especially in big cities where the daily commute often “steals” a lot of time.
Next up today at 15:30 GMT, the “Weekly Petroleum Status Report” from the U.S. Energy Information Administration (EIA). Last night crude oil traded lower after the an industry report from the American Petroleum Institute showed a surprise build in crude oil and a bigger-than-expected rise in both gasoline and distillate stocks.
While the report may only have a short-term impact, the market remains preoccupied with the early 2021 outlook and Thursday’s delayed OPEC+ meeting.
As per usual I will post updates and comments on my Twitter handle @ole_s_hansen
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)