Head of Commodity Strategy
Summary: Crude oil trade lower on a day where commodities in general are benefiting from the dollar's renewed weakness. The energy market remains troubled by too much supply at a time of where a rise in the number of global coronavirus cases once again raise concerns about the direction of global fuel demand.
What is our trading focus?
OILUKDEC20 – Brent Crude Oil (December)
OILUSDEC20 – WTI Crude Oil (December)
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WTI Crude Oil (OILUSDEC20) and Brent Crude Oil (OILUKDEC20) both trade lower on a day where commodities in general are benefiting from the dollar's renewed weakness. The energy market remains troubled by too much supply at a time of where a rise in the number of global coronavirus cases once again raise concerns about the direction of global fuel demand.
OPEC+ look set to meet on December 1 and decide whether to implement or postpone the previously agreed 1.9 million barrels/day production increase from January. With a vaccine still months away from being rolled out globally, the current slow recovery in fuel demand together with rising production Libya has left the group with a tough decision to make.
With the oil market currently stuck in the low $40’s there is no doubt that the key to short term direction of oil will depend on the outcome of that meeting. The U.S. election on November 3 will be another important driver given the opposite views on energy the two candidates hold. If the polls turn out to be right this time round and Joe Biden ends up in the White House, the market may receive a short term boost given expectations that increased regulations may slow a recovery in U.S production.
These two events are likely to be the main factors determining where Brent crude oil will finish the year within the $38/b to $48/b range we mentioned in our recently published Q4-2020 outlook. For now, both Brent and WTI crude oil remain stuck in ranges with Brent trading near the highs of the recently established range.
We suspect that crude oil, given its ability to withstand the deterioration outlook this past month, may end the year near the top of that range. Having done a great job in stabilizing the oil market, the OPEC+ group would not suddenly throw that overboard. Instead they will adopt a wait and see approach through the U.S. election before deciding on a three month delay to April.
Later today, the U.S. Energy Information Administration will publish its “Weekly Petroleum Status Report”. Some of the weakness seen today has been due to last night’s API report which showed a surprise increase in crude oil stocks while presenting a bigger than expected draw in both fuel products. Whether or not the report can move the needle on a market gone stale and where the focus is elsewhere remains to be seen. As per usual I will publish the result of the report on my Twitter handle @Ole_S_Hansen
In recent weeks both crude oil, gasoline and distillate stocks have declined while refinery demand continues to struggle, currently trailing the five-year average by 2 million barrels/day.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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