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)
____________________________________________________________________________________________________
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.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
