Thursday Oil Commentary: Prices rising but Brent still went off the board

Market Analysis / 3 Min Read
01 Oct 2020

Commercial oil stocks are steadily trending down; distillate stocks are down 6.5mb over two weeks. Implied demand is softening and could potentially slow the rebalancing.

There’s no sign of a return in US crude production, which is down 0.4mbd since July and down 1.7mbd y/y; Frac activity is increasing but it’s still far below levels needed to sustain output.

Painting a much more flattering picture of US oil demand than was expected, there were some surprisingly strong numbers in the weekly oil data report as Crude drew against consensus.

Crude stocks were down 2.0Mb, bullish vs. consensus of +1.6Mb, the five-year average of +1.4Mb, and bullishly higher than the 0.8Mb draw in crude reported by the API yesterday. Nearly half of the difference vs. consensus was driven by higher refinery utilization, up 100 bps w/w to 75.8% of operational capacity vs. consensus -30bps to 74.5%. Weekly production was stable w/w at 10.7Mb/d. Working storage capacity utilization was ~54%, with Cushing ~71%.

While I’d much prefer to defer to a lengthier time series of EIA inventory data to "draw" conclusions from, the latest report nonetheless paints a much less gloomy picture of oil demand than oil specialists suspected. 

Oil prices rose the most in two weeks after US stockpiles declined last week. However, November Brent still went off the board, 6% down on the month. US crude and product inventories falling was positive but offset by concerns. 

Still, there’s a vocal chorus of energy traders coming to grips with the idea that price recovery will be a lengthy process of stops and starts while discovering that elusive continuous trend will be problematic when navigating through the Covid haze. That’s merely a fact of life for oil traders these days as the market continues to trade in a slightly wider than usual intraday range-bound fashion. Of course, that view will give way when the case count curve flattens below acceptable healthcare standards.

But look, we’ve been down this road before and we all know the new game show prize, but it will be a lengthy period before a 70% effective vaccine is available. Hopefully the multiple virus suppressors currently in the pipeline will be able to raise herd immunity above 90% and folks can start traveling again. 

In addition, global risk appetite – to which oil prices remain very much tethered – is benefiting from positive noises around a stimulus deal from Washington DC. Both oil and equities are getting a boost with e-minis nudging towards 3400.

It's hard to see a scenario in the near-term where travel gets back to pre-pandemic levels, and even with a vaccine in the pipeline (several of them, actually), there are genuine concerns that "normal", as we knew it before February, isn't coming back any time soon.

The four-week average implied demand stood at 17.9mbd – down 3mbd (14.4%) y/y. US gasoline demand is softening but compared to seasonal norms; US gasoline demand remains broadly unchanged. However, distillate demand continues to weaken – down 0.2mbd since the start of September and 0.35mbd lower than 2019. Jet fuel consumption is down 0.1mbd since the end of August as the demand for commercial air travel wanes.

Substantial compliance from OPEC+ on cuts and limited upside for US production should keep supply below demand in the foreseeable future – Axi forecasts a ~3mb/d deficit both for 4Q20 and FY21. Hopefully, this should help global inventories move in the right direction, but the sentiment will remain sensitive to news flow (as per the NYC scare) on the coronavirus and the outlook for the global economy (as per the Fed).

For more market insights, follow me on Twitter: @Steveinnes123 

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