Crude oil’s latest run up to the highest levels since March 8 - when Saudi Arabia initiated its short-lived price war - has paused. Instead of focusing on the successful efforts by OPEC+ to support the market through lower supply, the market has instead, for now, turned its attention to risks that a renewed spike in COVID-19 cases may slow the process towards a further recovery in global demand.
Especially in the U.S. where several states, including Texas - the center of the U.S. oil industry - have halted their re-openings after infections jumped and authorities in Houston, Texas, said the ICU wards have reached capacity. In the meantime, U.S. stocks of crude oil continue to surge - reaching a new record of 541 million barrels to which can be added the 19 million barrels that have temporarily been deposited in government-controlled storage facilities.
For that to change much now hinges on the level of gasoline demand during the U.S. summer driving season from July to September. A period during which crude stocks are normally run down as demand from refineries pick up. The latest virus surge may see an even bigger contraction in miles travelled than the 15% year-on-year decline predicted by the American Automobile Association.
The OPEC+ group of producers have been doing a fantastic job in cutting production, highlighted by Russia’s 40% drop in exports from its western ports expected next month. But for the agreement to remain successful, the group also need to see light at the end of the tunnel with regards to when the taps can be turned back on. While we do not expect a repeat of the draconian lockdown measures seen recently, a flare up of new virus cases may further postpone the timing of when production can be raised, thereby potentially challenging the resolve of the group.
We maintain the view, as mentioned in our soon to be published Q3 outlook, that Brent crude oil will most likely trade within a mid-30’s to mid-40’s range during the coming weeks and potentially months.
Gold finally managed to break higher to reach a fresh 8-year high at $1780/oz, thereby getting tantalisingly close to the next key area of contention around $1800/oz. An area that between 2011 and 2012 proved to be a major battle ground and one that the bulls eventually lost when gold began its year-long slump towards $1050/oz.
While gold suffered a setback, it did not challenge support below at $1745/oz. A weekly close above $1765/oz and increased participation on the long side from hedge funds, who had cut longs by 50% in recent months, may send a positive technical signal to the market.