In line with broader markets, oil prices were hammered lower overnight as the growth assets buckled amid lockdown fears in Europe and the UK.
There continues to be concern around the effects on demand of the resurgence in Covid-19 cases globally as countries have to counterbalance the economic and health issues in getting back to work. The second half of 2020 was always going to reflect this price see-saw.
Tracking the afternoon US stock market recovery, oil prices recouped some of the NY morning losses during a lively afternoon session as risk sentiment showed signs of stabilising after a feverish 24-hour sell-off.
While mother nature is doing its part as traders focus on the hurricane season in the US, OPEC+ cuts seem to be tightening the market.
It is complimentary that OPEC+ appears willing and able to take a proactive approach to defend and stabilise the oil price. Macro uncertainty means a broad range of possible demand outcomes, even if supply cuts are enforced.
More oil from Libya
With Libya set to add more barrels back to the market, with a rise of more than 400 kb/d by December 2020, a pace similar to the 2014 and 2016 restarts, OPEC’s call for laggards to fully comply with their quotas by year-end must be delivered to offset the Libyan increased production risks.
The street expects the pace of economic recovery to slow over the next several quarters in most, if not all, economies.
The virus is expected to spread faster with the arrival of cold weather in the northern hemisphere. And thanks to a likely halt in US fiscal support until after the election this November, the near-term outlook for oil prices remains cloudy at best.
And many oil traders are subscribing to the dominant macro narrative that as far as the oil prices recovery is concerned, last week’s top might be as good as it gets for a while when mapping oil prices tangentially to the rebound in economic activity.
Floating oil storage in North Sea
At least four oil tankers in the North Sea look like they are being used as floating storage; between them, they are carrying 4.2 million barrels. They have all been floating offshore for a week or more, suggesting that trading houses continue to buy and store offshore.
The medium-term trend seems supportive, but the longer-term looks challenging, with several large oil companies expressing concerns about the demand outlook. Most recently, CNPC suggested refined product demand in China could peak much sooner than expected, with accelerating electric vehicle penetration reducing gasoline and diesel demand to less than 1% p.a. in the coming years before a peak in 2025.
Indeed, the electric cars will surely do to the oil industry what the Edison light bulb did the candle factory in the not too distant future.
Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp