Crude oil plunged to a 6-month low and dropped by around 10 percent in October as new lockdown measures in some parts of the world exaggerated the worries about demand recovery stalling.
Risk appetite took a hit this month on fears of the prospect of a tightly contested US presidential election, absence of a pre-election US fiscal stimulus and gloomy corporate outlook. Any hopes of bullish sentiment was tampered by reports that the three biggest OPEC producers – Iraq and Kuwait, behind Saudi Arabia – may not be on board with extending the current cuts into next year and are reportedly not particularly inclined to support a rollover of the cuts of 7.7 million barrels per day, because such cuts are too deep for their economies and budget incomes to sustain.
It looks like the risk appetite in the market is definitely lower and the return-in-demand story is taking a lot longer to play out than oil bulls had hoped. A return to tougher lockdown measures will likely deter a substantive rebound in airline demand, with more restrictions in Europe prompting further cuts in airline capacity for the remainder of the year. Still, there’s some support from booming freight markets and improvements in China and India.
Now China is probably the brightest spot in the oil market with declining US oil production coming in second place. New refinery startups in China are helping to absorb some of the crude oil from the Middle East amid an otherwise depressed market with stalled demand recovery.
Large private Chinese refiner Zhejiang Petrochemical has been buying millions of barrels of crude from the United Arab Emirates, Qatar, and Iraq in recent days, for delivery in December and January. The Chinese purchase is good news for the oil market rebalancing as resurging COVID cases and new restrictions in many countries point to more slowing of the global economic recovery and oil demand recovery through the rest of the year.
China’s oil imports in September increased by 2.1 percent MoM to 11.8 Mbpd, the first monthly rise in three months as cargoes delayed because of port congestion cleared customs last month. Between January and September, China’s crude oil imports increased by 12.7 percent on the year, in the latest positive sign for demand in the world’s top oil importer.
While Crude fundamental points a fragile market structure, the change in the US Government leadership can bring some life to Crude oil prices. Democrats favour either banning or phasing out fossil fuels. The Trump administration has been an advocate for US oil and gas production and energy independence from the Middle East, Russia, and other international producers.
The election will determine the future of US energy policy. Oil traders’ other big concern is the uncertainty of Iranian exports under a potential Biden administration. It’s no secret that Democratic presidential candidate Joe Biden would work to reinstate the Iran nuclear deal, under which sanctions relief is the big carrot for Iran and can bring back oversupply concerns back in the markets.
Markets are worried that OPEC deal is under threat as reports suggested the unwillingness of OPEC’s three largest producers – Iraq and Kuwait – behind Saudi Arabia to agree to keep the deep cuts could become a source of renewed tension in the cartel and the larger OPEC+ group, and create new drama when the alliance meets later this year to set the course for 2021.
This throws a wrench into efforts to rebalance the market, and even though Saudi Arabia, and even at-times-hesitant Russia, appears ready to continue 7.76 Mbpd of cuts next year. Data showed that OPEC oil output increased by 2,10,000 Bpd in October with Libya and Iraq ramping up production.
Libyan production is now on the rise after a blockade of its ports was lifted, and OPEC expects the country’s output will hit 600,000 barrels a day by the end of the year and maintain that level of production through 2021. There are fears that Libya, which has had success ramping up production quickly in the past, could produce as much as 1.1 million barrels a day next year. Iran and Venezuela, both exempted from the supply cuts due to their being under U.S. sanctions are also emerging as potential supply-side problems. Some reports suggest that Iran is exporting far more oil than Washington believes, using its extensive network of black-market intermediaries to circumvent sanctions. OPEC will gather for its biannual meeting in late November.
A question arises, how bearish is the oil market? There’s roughly the same amount of banks and hedge funds betting that prices will fall now as there was back in April at the height of the COVID-19 pandemic when US crude traded in the red. Clearly this latest wave of COVID will weigh on oil demand with OPEC+ likely being under pressure to take action when they meet at the end of November. All the while, traders are looking ahead the US election and an OPEC+ meeting at the end of November. For now, this would likely mean just a rollover of current cuts into 2021, which would also help offset the return of Libyan supply.
However what happens if Biden wins the US election? There is the potential that he returns to the Iranian nuclear deal, and lifts sanctions, which could bring anywhere between 1.5-2 million barrels of Iranian oil supply back onto the market. This additional supply would be difficult for the market to absorb, and a challenge for OPEC+ to offset. There’s a really high level of insecurity out there surrounding the election, surrounding the path of economic growth, and this new surge in infections. Until you get some evidence that things are starting to improve, it’s going to be tough for crude to move higher and the weak season could send the price for a test between $30 and $35 per barrel.