Oil stumbles as Covid-19 consequences surface

"Yesterday hurricane related oil price rise was like a quick breath in oil’s struggle to keep afloat. On Wednesday reality kicked in again in full might, pushing prices below US$40.

Prices fell as the Covid-19 pandemic is holding strong, registering daily new infection count highs across several countries, causing governments to reimport strict lockdowns which in turn reduce demand for oil as a result.

In the US, the hit that oil demand has taken was visible in last week’s oil inventory build, which came much higher than the market expected. The build was a mini-shock for traders, not something they never expected to happen – but rather a development they slightly hoped would just not come.

News from Europe also helped pull down prices, as both France and Germany are expected to announce new curbs to fight the second wave of Covid-19.

Parts of Germany’s 2.3 million bpd and France’s 1.5 million bpd of oil demand are under threat to year-end. Especially Germany’s 1.4 million bpd of road and aviation consumption and France’s 900 000 bpd.

We won’t see a 40% drop in Germany, nor a 65% drop in France like in April 2020, but a 10% drop in current oil consumption is definitely possible in the next weeks, as restrictions are more targeted this time.

Moreover, we believe portfolio managers are increasingly reducing risk ahead of the US election, which will lead to increased market volatility also in crude, which is used as a hedge in some money managers portfolios.

It doesn’t help either that Libya is up to around 620 – 650 000 bpd of crude production already, but the full 1 million bpd target sounds to us more like a capacity estimate goal from the NOC, rather than outright realistic production.

Nevertheless, we warn that stars are aligning for a period of sub-40 Brent ahead, until we know the results of the US election.

A Biden win would in our current view likely result in continued negative pressure on crude prices in the short term, while a Trump win might halt the bearish winds.

But Covid-19 restriction measures are in the driving seat of oil price formation still, with the US election in a firm second place, followed by other news such as Libya, crude stock numbers and M&A merger news in the upstream industry.

With so much uncertainty from all angles, the coming weeks will be crucial for oil, so tighten your seatbelts as the election night is across the corner and Covid-19 infection news race."

Read the article online at: https://www.oilfieldtechnology.com/special-reports/28102020/oil-stumbles-as-covid-19-consequences-surface/