Oil markets on hurricane watch
Oil traders are back on hurricane watch, but it is all shoulders and heels while dancing to the tune of broader markets amid more gloom on the supply side
Some Gulf of Mexico oil producers on Saturday idled production bracing for another hurricane brewing off Florida. But so far, the hurricane impact is getting offset by yet another gloomy short-term view that is likely disheartening OPEC’s attempt to stabilize markets.
Reports that Libyan commander Khalifa Haftar gave his “personal commitment ” to reopen the energy sectors could bring more barrels back to the market at the most unwelcoming time of the year.
Unquestionably, this could put OPEC+ in an even more giant pickle when they hold a virtual meeting on Thursday to review the current production intervention level’s price impacts.
But one can be assured the cartel will not be happy to witness markets building a steeper contango since the last meeting.
Oil prices were carving out a bit of a base last week, although price action had remained tethered to the whim of the broader market sentiment shifts rather than any oil-specific news into weeks end. Suggesting oil prices, outside of the Libyan supply impact, might continue dancing to the tune of the broader markets again this week.
Demand for oil tapers as driving season ends
Seasonally, crude oil does not perform very well during the shoulder season, defined in the fall roughly by the end of Labor Day to October.
To be sure, this is getting compounded by an unusual set of factors this year. Oil hedgers remain concerned that seasonal weather trends could also trigger a resurgence of the virus as summer gives way to autumn and social activity moves indoors where the spread of the virus could be more prevalent.
So instead of dealing with just one of the oil markets’ primary “Achilles Heels,” we could be simultaneously dealing with two this year.
Will the colder months drive demand higher?
Colder weather is not all bad for oil demand as seasonally we are a month or two away from winter heating demand, which typically helps draw down summer distillate builds.
To be sure, this is one of the most considerable unknowns the market faces: to what extend will Q4 distillate demand look like, and will it be enough to clear out the inventory glut and is crucial for refiners to resume bringing capacity online.
In the absence of positive vaccine news, which will be the key for the 2nd part of the global economic recovery or an unlikely consensus to the US stimulus debate, at the heart of the matter sits little in the way of pick up in demand.
The biggest issue is the weakness across gasoline and distillates. US gasoline demand has softened considerably in the last two weeks, which is the most worrying issue for short term traders.
Considering we are at the end of the summer driving season, demand tails off seasonally from September onwards. Weakening gasoline demand could further crimp refining margins.
Commodity houses buying oil for later delivery?
Spreads have weakened again, and despite an uptick in freight rates, there are reports commodity houses have continued to book tankers to store both crude and diesel for later delivery.
Tanker rates peaked in March, reaching USD250k a day. They collapsed to around USD4,500 a day last Friday and are now about USD13k a day. The five-year average is USD39k a day.
At this stage of the game and looking at Friday’s crude price action, this seems to be as much of a freight rate play as it is a bet on oil, although it does offer a modicum of downside support to Brent.