There are two takeaways from today’s oil price move and both are equally interesting.
Firstly, oil prices are declining and there is a clear reason, the supply-demand imbalance. While many market participants were expecting a week of crude oil stock draws in the US, the API industry report revealed a forecast for a surprise build instead.
Rising storage levels indicate that there is again more oil produce than the market needs, while the taps don’t seem to be closing, quite the opposite. Traders wondered today how the world can absorb the increasing supply when the needed demand is just not there.
If supply keeps rising, and without any OPEC+ decision to postpone January’s scheduled oil production increase, while Libya’s output is also rising, the situation can only deteriorate and storage might need to take on even more unused oil.
The only way for this trend to stop could be Covid-19 slowing down, which at the moment seems like a distant hope for the short-term, or for the rising supply to be further curtailed.
During Covid-19’s first wave, prices caused a supply curtailment with production facilities shutting in due to economics. At the current price levels, break-even prices are met or exceeded so such a price-related supply reaction is not at the moment forced.
Now, going back to API’s projection, a confirmation of this storage figure later today by the DOE will be likely be accompanied by a higher-than-expected drop in refinery activity.
According to tanker tracking data reviewed by us, US net imports dropped 800,000 bpd w/w during the week ending October 16, and based on the reports Bureau of Safety and Environmental Enforcement (BSEE), GoM production remained subdued during that week. Therefore, only a hefty drop in refinery utilization rate could justify the build.
A second takeaway from the recent oi price behavior, and maybe what is a more insightful observation, is the remarkable resilience of oil prices recently.
Before the API report came to light, oil prices were trading up despite the Covid-19-caused worsening demand outlook and the quick ramp-up of Libya oil supply.
The resilience of oil prices is surprising given that none of the positive news the market’s bulls were waiting this week came to pass.
Trader hopes that OPEC+ would roll over its current supply cut levels were not yet met. Instead the alliance once again warned the market about a precarious demand outlook and highlighted of the importance of compliance. Further action may be taken in the next meeting of course, but still we are a month away.
Also, with just two weeks before the US presidential election, an agreement between US Democrats and the White House on an additional stimulus package has still not been achieved, a development that is normally concerning for an economy that looked for means to grow again.
The real question is how prices can be so resilient and maintain 40+ dollar levels in market conditions that are so unfavorable.
It is possible that the trading panic of the first wave gave place to a feeling of getting used to the situation and learning how to live with it, supported by hopes that if help is needed to reduce oil supply, OPEC+ will eventually step in. Or that the economics of the market will again force the most expensive oil production to close the taps and the market will self-balance again.
