Oil looks to OPEC+ for support as outlook deteriorates

Commodities 5 minutes to read

Ole Hansen

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.

Source: Saxo Group

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.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.