There were three major events yesterday that shaped oil prices and judging by the decent rally they were constructive on balance. The US central bank now expects a smaller economic contraction for this year than previously thought. It is set to stand at 3.7%, down from 6.5% estimated in June. The job market will also improve quicker than anticipated as unemployment is now forecast to fall to 7.6% by the year end and to 4% by 2023. Inflation is to remain below 2% for the next three years. Despite the upbeat forecasts US stocks produced a late reversal yesterday and settled well off the highs.
Hurricane Sally arrived at the US Gulf Coast as a Category 2 storm. It was not as capricious as its elder sister, Laura but still managed to shut more than 25% or 500,000 bpd of offshore production providing support for oil prices. As producers prepare to resume production oil prices are retreating from yesterday’s price spike.
The hurricane left a tangible mark on US crude oil inventories, which drew 4.4 million bbls and dipped below 500 million bbls. The lion’s share of this fall took place in PADD3 (-2.8 million bbls), whilst nationwide production was up but stayed below 11 mbpd. The slight depletion in gasoline inventories helped CME RBOB finish the day on a strong note but the build in distillate stocks (+3.5 million bbls) had Heating Oil to lag. The Fed has painted a brighter economic future than previously thought but this optimism is not reflected in the present, at least as far as US oil demand is concerned. Domestic consumption took a 1.7 mbpd weekly hit with gasoline demand improving slightly but thirst for distillates falling 900,000 bpd week-on-week.
Geopolitical flare ups add to uncertainty
It is not just the infection rates of the Covid-19 virus that spreads across the world creating uncertainty in the financial markets. Recent geopolitical developments are also contributing to the unsure outlook in the next few months. Growing tension between world powers inevitably leads to unstable environment, which, in turn, increases volatility. There are currently four geopolitical hotspots that could create hectic trading conditions in the foreseeable future. These are the US-Chinese relationship (or the lack of it), the upcoming US presidential elections, Brexit and the possible EU retorsion on Russia in the light of the recent poisoning of Vladimir Putin’s utmost domestic critic, Alexei Navalny.
US-China stand-off: the economic and political relationship between the two superpowers started to sour ever since Donald Trump occupied the White House. Reciprocal import tariffs led to a trade war. Although tensions started to ease at the end of last year after signing Phase 1 of the trade agreement the calmness did not last. China’s treatment of its Uighur minority, the introduction of the new security law in Hong Kong, the mutual closure of consulates in both countries and the US ban on Chinese tech companies (TikTok, WeChat) all imply a significant deterioration is the relationship between the two nations. Investors are so far relaxed by the rising tension but the break-out of another all-out trade war will greatly upset the current status quo.
US elections: the presidential elections are merely 46 days away and the stakes are high. Current odds do not favour the incumbent president, and this is why one has to be prepared for the worst. Democratic Party nominee Joe Biden leads 51% to 43% in national polls, but the elections are like a tennis game: he, who wins the popular vote will not necessarily get elected. Nevertheless, Donald Trump’s chances are presently slim. Consequently, ratcheting up pressure on China (or any other trading partner for this reason), prematurely introducing a virus vaccine and further polarizing the US are very much on the menu in the next two months. Or maybe even longer as Donald Trump might just simply refuse to concede in case he loses claiming that fraudulent postal votes distorted the result. This would push the country into a constitutional crisis with the possibility of civil unrest and all the economic consequences of the upheaval.
Brexit: those who could not believe their eyes when reading about the latest U-turn of the UK government in the Brexit saga probably went for 30 miles drive to test their eyesight. It is apparently perfectly acceptable to break the law in a “specific and limited way” in the name of something patriotic. This noble thing is to prevent a foreign power from breaking up the United Kingdom. The sudden change in rhetoric and strategy is reminiscent to those in illiberal democracies (Hungary’s Orban, Brazil’s Bolsonaro, just to name two) and does not augur well for economic recovery. It remains to be seen if the planned introduction of the internal market bill is just a way to gain leverage in upcoming negotiations or the government will actually see it through (probably the latter), investors have voted with their dollars: when the news broke sterling fell from nearly 1.35 to below 1.28 against the greenback.
Russia: the country’s standing with the West has considerably worsened since the annexation of the Crimea in 2014. Not only has there been no thawing in relationships, but events have taken a turn for the worse amidst the poisoning of Alexei Nalvalny, President Putin’s most vocal opponent. The Kremlin denies accusations that it was involved in the attack but it faces international condemnation – with the notable exception of Donald Trump. Berlin is floating the idea of further sanctions together with other EU allies. Such is the uproar that Germany has even hinted at halting work on the nearly completed €9 billion Nord Stream 2 gas pipeline. Mr. Putin’s support of Belarussian strongman Alexander Lukashenko can also cause additional consternations west of Moscow.