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Charu Chanana
Chief Investment Strategist
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Crude oil holding up well despite multiple headwinds
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil has extended its decline following yesterday's break below technical support. The latest weakness apart from the technical sell extension has been driven by continued worries about the pace of the recovery in global fuel demand and renewed dollar strength following last nights debacle of a debate between Trump and Biden.
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OILUKNOV20 – Brent Crude Oil (November)
OILUSNOV20 – WTI Crude Oil (November)
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WTI Crude Oil (OILUSNOV20) and Brent Crude Oil (OILUKNOV20) have both extended their declines following yesterday’s break below technical support. The latest weakness apart from the technical sell extension has been driven by continued worries about the pace of the recovery in global fuel demand and renewed dollar strength following last nights debacle of a debate between Trump and Biden.
Adding to this, speculation that Libya’s oil industry, all but shut down since January because of civil war, may see rapid output growth over the coming months. So far production has returned to 250,000 barrels/day from sub-100,000 just a few weeks ago with JPMorgan and Goldman Sachs both seeing it reach 500,000 barrels/day by the end of year.
The demand side meanwhile remains troubled by the continued rise in Covid-19 cases leading to renewed lockdowns. With the timing of a widely available vaccine still uncertain, the captains of the three biggest independent oil trading houses don’t see a meaningful recovery in global oil demand for at least another 18 months.
Despite these latest developments, crude oil has done relatively well with the price still holding levels seen in June when the recovery story looked somewhat brighter. While resistance in Brent crude oil as per the chart looks solid around $43.50/b, the downside has so far also been capped by a number of recent lows around $39.50/b. For the final quarter we lift our Brent crude oil range by 3 dollars to a $38/b to 48/b range with the downside risks most dominant during the coming weeks.
During the recent weakness WTI crude oil has seen its discount to Brent narrow on speculation that U.S. oil production may shrink further over the coming months. The third quarter Energy Survey by the Dallas Fed, released last week found that 66% of oil and gas executive thought that U.S. oil production had already peaked. In addition the survey also found that a price of WTI above $51/b was needed in order to increase production. In addition many producers may struggle to source financing while the potential election of Joe Biden as president could pose a structural downside risk given his push towards green energy.
These developments all point to a price supportive lowering of U.S. production over the coming months as the price and with that drilling activity remain below the level needed to maintain production at current levels. The U.S. Energy Information Administration will later today publish its Monthly Crude Oil and Natural Gas Production report which will include production data for July, a figure more accurate than the weekly estimates that can be found in the ‘Weekly Petroleum Status Report’ also due today at 14:30 GMT.
Later today, the U.S. Energy information Administration will release its ‘Weekly Petroleum Status Report’. The American Petroleum Institute delivered mixed report last night with the biggest surprise relative to EIA surveys being a rise in gasoline stocks and a bigger than expected drop in distillates, primarily diesel.
As per usual I will publish the result of the report on my Twitter handle @Ole_S_Hansen
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