The
outlook for demand for key commodities, not least energy, remains challenged by
the not yet under control Covid-19 pandemic. While the situation in Europe,
except for the U.K., and China among others have improved, globally it is still
worsening with a record number of new cases being reported – mostly in the
Americas and South Asia.
There
are more and more indications that a possible second ware of the pandemic could
be taking hold in some U.S. states and that was the key driver behind the
latest market developments. Not least considering that most countries
experiencing a second wave, including the U.S., are unlikely to adopt renewed
lockdowns measures for fears of the economic impact.
These
developments helped send crude oil sharply lower to record its first weekly
drop since April. The risk of a second wave slowing the recovery in global
demand will pose multiple challenges. Not least to the OPEC+ group of producers
who just recently managed to agree to a one-month production cut extension.
These
cuts now translate into spare capacity which can be brought back when the
demand has recovered and the global overhang of stocks has been lowered. The
group can for a period control supply, but not demand and a weak recovery in
demand may challenge the group’s resolve with the risk of quota cheating
emerging.
The
impact of Saudi Arabia’s ill-timed price war back in March continues to be felt
in the U.S. where millions of extra barrels of imported oil from the Kingdom
have helped send commercial stocks to a record high. While these flows will
slow over the coming weeks, the positive impact on prices may not materialize
for some time due to the combination of elevated gasoline and not least
distillate stocks and the slow process with which demand continues to recover.
Adding to this the risk that some shale oil producers may start to increase production
as long forward prices remain around current levels.
Both
WTI and Brent crude oil did not manage to close the gaps that were left open
when the markets collapsed in early March after Saudi Arabia embarked on its
short-lived price war. Instead, the market behavior following the agreement by
OPEC+ members to extend the 9.7 million barrels/day production cut until the
end of July, ended up signaling the beginning of an overdue
correction/consolidation.
Hedge
funds have been strong buyers of WTI crude since early March with the net-long
reaching 380 million barrels in the week to June 2, the largest bullish bet on
WTI crude oil since August 2018. While our longer-term bullish outlook hasn’t
changed the next few months may look a bit more challenging with renewed
Covid-19 outbreaks in the U.S. being the trigger that reduces the speculative
position.
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