It’s has been an exceptionally rough day for the oil sector and broader markets in general as the lockdown lambaste wholly flipped the reflationary narrative on a dime.
Global markets trembled Wednesday as a disquieting rise in coronavirus infections shattered investors’ psyche and now pose a clear and present danger to a nestling economic recovery.
France is quickly turning back the clocks to spring while taking a frightful step back into Covid-19’s economic abyss.
The Covid-19 blade only cut one way overnight with few willing to catch that falling knife.
Investors not buying
Notable was the lack of buying – compared to outright selling – even the wall of money appeared unwilling to add risk ahead of the US election next week. Still, it does feel like equities are at a point of maximum pain with other asset classes behaving relatively well (industrial metals, etc).
While the market is clearly in the process of resetting Q4 expectations, the potentially favourable tailwinds of a vaccine, a Brexit deal, and cleaner positioning cannot be overlooked.
History tells us mobility restriction sell-offs can be harsh even if the economy’s incremental negative impact is mitigated through targeted lockdowns.
But what always tends to come through like a chocolate cake with a cherry on top, especially when the markets are in their deepest despair, is that stimulus always seems to save the day.
With the world facing a second wave of infections compounded by an unknown level of disruptions and costs, framed with that gnawing fear that governments and central banks alike are so deep into their tool kits, some policymakers remain hesitant to unleash bazookas.
It is all the more critical that the showcased responses to the indeciduous flu bug are seen to be overdelivering.
Challenging environment for European policymakers
European policymakers have a chance to make one of the biggest transformative policy splashes in the history of the Eurozone. If there was ever a time to make a clear and unambiguous unified statement and bear the burden of the crisis debts, it’s now.
Time to do away with the inane debate over the “rule of law” conditionality that threatens to delay implementation beyond the Fund’s touted 1 January 2021 start date.
And for those member states willing to spend grants but not draw down on the Fund’s loan facility, it is also time to indicate they will use the RRF as policy markets will need to use every option in the EU Recovery Funds arsenal to buttress the economic free fall from this second wave.
Oil price action looks ugly
Oil price action is looking mighty ugly. The proximate cause of the overnight meltdown was the US Department of Energy (DoE) numbers, which showed a massive build in crude oil stocks of 4.3m barrel, well ahead of the 1.1m build expectations.
As lockdowns begin to bite on demand concerns across Europe, the near-term outlook for crude starts to deteriorate.
With that in mind, it’s worth mentioning the spread between Brent and WTI has narrowed in recent sessions and is at $1.66 per barrel now compared with $2.25 a couple of weeks ago.
That makes sense with the European nature of the lockdowns so far. Still, the fundamental issues of delivery and storage in the WTI space haven’t gone away, and if we stay on this demand trajectory, don’t be surprised to see some sharp losses in the coming weeks.
Crude stocks increased 4.3 million barrels on the week due to the return of shuttered crude production and still-weak refinery throughputs. At the same time, oil stocks at Cushing (where NYMEX WTI settles) fell for the first time in six weeks.
But that explanation merely sugar coats the ugly looking forward narrative.
However, it might provide a sufficient impulse for some buying interest in Asia, whether profit talking or opening up new longs; WTI 36.45-95 has proven to be a decent “buy zone” back to the beginning of September. But if that zone gives, it could be bottoms up for the oil bulls for a while.
Oil markets are such an emotional roller coaster. The worrying aspect for me is the overall level of market angst. The return of the “Sudden Stop” economic nightmare will play a considerable role in the oil market’s mindscapes over the next few weeks, and it is this fear that keeps traders awake at night.
Overall, traders worry when US oil stocks are still 42mb (9%) above their 5-year average. It’s also hard to get bullish when expectant demand could fall off the cliff as more lawmakers increasingly feel pressured to impose more stringent mobility restrictions.
Unfortunately, policymakers find themselves in the most unenviable place of choosing between saving the economy or healthcare concerns. And the policy lines get struck around the most sensitive commodity of them all, human lives.
Fortunately, oil has OPEC+ to lean, OPEC + decision branches are relatively straight forward. From here, if there is unequivocal proof that global demand is contracting, do the lockdown OPEC might be tempted to make deeper cute. But with the Covid-19 beat downs and Libya ramp up, I think it would be a safe bet OPEC+ might choose to delay the two million barrels per day tapering decision well into 2021
Oil is not going anywhere until we get a vaccine, and even then, the bottom line for oil is relatively straightforward.
It is hard to imagine any scenario in the near-term where air travel gets back to pre-pandemic levels. After all, who wants to get stuck in a country halfway around the world amid another national lockdown waiting for the next government repatriation flight to return you home.
Equity and Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi