Oil prices bounced off overnight lows and are finding tentative support from broader markets and appear to be in some semblance of consolidation mode after traders were served up another dish of angst when OPEC+ revised their demand outlook downwards.
But the storyline remains the same as traders are bullish longer-term around the favourable prospects of a vaccine. In contrast, over the short term, they remain deeply troubled by a heavy topside to supply scenario through year-end versus second wave Covid-19 demand concerns.
There is a palatable level of uncertainty that continues to play out in price action.
Sentiment has turned very bearish as we move into the shoulder-season post US Labor Day.
The market appears concerned about the draw in inventories slowing as bullish bets peter out with traders equally worried just how precipitous the oil price decline could be during the second wave of the coronavirus pandemic.
Focus on OPEC+ meeting this week
There has been relatively little in the press about the OPEC+ deal ahead of the meeting this Thursday of the Joint Ministerial Monitoring Committee (JMMC).
Still, there have been signs of strain since OPEC’s last JMMC with Iraq and Nigeria struggling from the outset to comply with their quotas under the OPEV+ agreement.
While they have agreed to over-compensate as other producers ease cuts in line with the assumed arrangement – time will tell whether this happens or not.
But a new problem producer has emerged within OPEC with the IEA and Petro Logistics reporting that the UAE produced ~3mb/d in July and even more in August, against an OPEC+ target of 2.6mb/d and this is concerning for the group’s overall commitment to compliance.
Looking at where price action for both grades is anchoring, and as Brent loses the psychological $40-dollar mark, there is a powerful incentive for OPEC + to present a unified front to avoid any hit to compliance sentiment.
The group cannot afford open signs of discord or to allow compliance to weaken, particularly at a point when there are also indications of softness in global demand.
Demand forecast downgraded
OPEC has also downgraded its outlook for global demand, which raises the obvious question of why they prematurely eased production cuts last month.
But will OPEC blink Thursday and fend off the oil glut as the resurgence of coronavirus still weighs on the demand outlook? Price action so far says the market does not think so.
To a degree, some of this angst was expected after the initial demand rebound and easing of emergency OPEC+ production cuts. Still, it will likely take 18 months or more to repair the damage done in 1H20.
Hence, we should expect prices to recover only slowly once reopening starts to pick up again.
Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp