Markets hate uncertainty. And we saw plenty of it on Friday. Oil and equities were a sea of red as a US-centric session added to the growing air of uncertainty. To begin with, stimulus hopes were dealt a blow as optimism for a breakthrough on a coronavirus relief package fizzled out. This came as fresh efforts by Democrats and Republicans to find a compromise came to nothing. Meanwhile, doubts over US recovery intensified after a disappointing non- farm payroll report showed the pace of job creation slowed in September. And then came the final killer blow – the announcement that COVID had struck at the heart of the West Wing.

President Trump together with several members of his entourage tested positive for coronavirus. This added to already-heightened levels of US political uncertainty and came on the heels of a chaotic first presidential debate. Yet as much as Donald Trump’s diagnosis jolted markets, it should not have come as a surprise. Let us not forget that he has consistently adopted a cavalier attitude to the use of face masks and social distancing. The US President was initially reported as only having mild symptoms but was hospitalised as a precaution. His doctors have indicated that he may be discharged as soon as today.

Even so, this still marks a major turning point one month before the election. President Trump will have to quarantine for some therefore plunging the campaign in uncharted territory. The race to the White House has effectively been paused just as it reaches the final stretch. As for Trump’s re-election bid, his diagnosis will surely do him no favours. Voters are now more likely to punish the incumbent for minimising the seriousness of the pandemic in its early stages.

Aside from the US election disarray, the energy complex continued to grapple with weakening consumption. The demand side of the oil coin remains at the mercy of surging COVID-19 cases. All the while, the supply side took a turn for the worse in the wake of returning Libyan barrels. The country’s output rose to 270,000 bpd on Friday, less than two weeks after a force majeure was lifted on its oil exports. Libya’s warring sides are due to resume military talks this week as they work towards lasting ceasefire and normalisation of its oil production.

The upshot was that bearish fodder was in plentiful supply last week. Accordingly, Brent and WTI lost more than $3/bbl over the period. That said, both crude markers are regaining ground this morning amid escalating strike action in Norway and the prospect of Donald Trump returning to work. Yet this bout of strength is unlikely to have the legs to withstand the growing pile of unknowns. After all, the oil market is trapped in an unending cycle of uncertainty.

Brent pain

The oil market’s summer lull is well and truly over. After treading water in the June-August period, price vola- tility returned with a vengeance in September. Monthly ranges on Brent and WTI jumped to $7/bbl. Moreover, the average daily range standard deviation rose to 62 cts/bbl on the former and almost doubled on the latter to 69 cts/ bbl compared to the previous month. It’s no surprise, then, that the two leading crude futures contracts enjoyed strong levels of trading activity in September.

Average daily volumes (ADV) on CME WTI stood at 814 million bbls last month, up 9% from August and the second straight monthly gain. The recovery was even more pronounced for the European crude benchmark. ICE Brent ADV surged to 755 million bbls in September, a whopping 22% jump from the previous month. The reason for the relatively more lively showing on ICE Brent is that it bore the brunt of an aggressive repositioning in speculative positions. Bullish bets on ICE Brent benchmark shrank by 91 million bbls or 48% in the four weeks to September 29. Consequently, holdings of ICE Brent contracts within the investing fraternity have slumped in value to $4 billion compared to $29 billion at the start of 2020. This swift pullback was driven by a liquidation in gross longs. In other words, market players believe that near-term upside potential will be in short supply for Brent. Meanwhile, net speculative length in CME ICE WTI fell by a far more modest 22 million bbls or 7% over the same period.

In truth, Brent’s relative perkiness in September should not come as a surprise. This is because the prevailing bearish price drivers are having an outsized impact on the international Brent benchmark. First and foremost is the unrelenting rise in COVID infections. The pandemic is far from being under control with global cases scrambling past 35 million. Infection rates are accelerating in many parts of the world, including several major oil demand centres such as the US and India. All the while, a number of European countries are in the midst of a full-blown second wave. Restrictions and localised lockdowns have been introduced. Suffice to say, this has undermined mobility which in turn has put the brakes on the fragile fuel demand recovery. In short, a dark cloud is hanging over the oil demand outlook.

Compounding the darkening global demand backdrop is a flurry of fresh oil supply. OPEC+ cuts were relaxed in August but it appears that the producer alliance loosened the leash further on supply curbs last month. Output from OPEC-13 rose by 160,000 bpd in September, according to a Reuters survey. Meanwhile, official figures showed Russia’s oil and gas condensation production increased by 70,000 bpd over the same period to a smidge under 10 mbpd. And then there is the Libya factor. The embattled North African producer’s oil sector is undergoing a revival in fortunes following the recent lifting of an eight-month blockade. Production has almost tripled in the past two weeks and further gains are anticipated as it ramps up export activity.

This double whammy of surging COVID infections and rising global supply curbs for an unfavourable backdrop for Brent. Small wonder, then, that it has been unable to shake off its contango woes. The Brent contango is of a deeper and longer-dated nature when compared to WTI’s forward curve. This has made it even less of an attractive investment vehicle and even more reason why it has become the bogeyman of the crude complex within the investing community. Looking ahead, the combination of demand uncertainty and rising global oil supply will act as a drag on the oil rebalancing. Simply put, oil prices will struggle to rally significantly from current levels in the near term. This downbeat outlook is echoed by the latest Reuters poll in which forecasters trimmed their Brent forecast for the first time since April.