How one COVID-19 case dominates the market

Oil markets recovered on Monday morning after closing lower last Friday, Oil Price writes in the article How One COVID-19 Case Dominates The Market. The discharge of the U.S. President from hospital generated a sort of relief in the markets. The reversal on Monday followed a brief period of uncertainty about the US President’s health after he and his wife tested positive for COVID-19 last Thursday, strengthening bearish sentiment in crude markets. As a result, Brent closed at $39.27, down by 7.40% w/w while WTI closed at $37.05, down by 7.95% w/w, last Friday. Money managers reduced by their net long positions by 19.68 million barrels w/w to stand at 304.81 million barrels in WTI contracts, while Brent contracts showed a similar trend as money managers reduced their net long positions by 6.97 million barrels to stand at 97.22 million barrels. 

Trump's case to dominate markets

The health situation of the U.S. president looks stable at the moment, but any deterioration could have a dramatic impact on U.S. elections and a negative impact on oil markets. The President may transfer authority to Vice-President Mike Pence if his ability to run the country is severely affected. Yet, U.S. elections are unlikely to be delayed, even if Trump's case worsens. In our view, the markets are not pricing in yet the possibility of a Biden victory on November 3rd. Yet, if Biden wins, the U.S. energy transition will accelerate, with almost $2 trillion to spend on clean energy while reducing oil production activity. Investors may be particularly worried about the geopolitical implications of a Biden victory in the Middle East, which may include renegotiating a nuclear deal with Iran and a possible alleviation of sanction, including on crude oil exports. This would also increase uncertainty about the OPEC+ deal, in which President Trump had a heavy hand.

Fundamentals continue to be weak  

Oil market fundamentals continue to be weak especially with rising supply from Libya, and increasing COVID-19 cases globally. In India, the number of COVID-19 cases exceeded 6.5 million with the reported number of deaths surpassing 100,000. The UK has reported more than 20 thousand daily new cases while France's daily new cases have exceeded 15 thousand. The rebound of COVID-19 cases in Europe is thought to be a result of the quick re-opening of economies during the summer including the opening of schools and airports. This surge in infections raises concerns of new lockdown measures on the European continent over the next few months, which may lead to a slower recovery of global oil demand.    

Last week, the EIA continued to show bullish figures on the US demand recovery, which had little impact on the markets. US oil stocks declined by 2 million barrels to stand at 492.4 million barrels while gasoline stocks rose by 0.7 million barrels and middle distillates declined by 3.2 million barrels.

The sharp decline in middle distillates is especially encouraging for the markets as it reflects an increase in industrial activity. The U.S. refining throughput rose by 0.3 million bbl/d w/w to stand at 13.67 million bbl/d as of 25th Sep. Furthermore, the US oil rig count continued to rebound to stand at 189 rigs, up by six rigs w/w, supported by lower price volatility between July-October. EIA data also suggests that US apparent oil demand declined for the second consecutive week, standing at 15.28 million bbl/d, down by 0.24 million bbl/d w/w. The decline is seasonal as we’re slowly moving away from the end of driving season toward winter season.

The impact of Norway’s strike is so far limited  

Meanwhile, the markets had a bit of support in the form of a labour strike in Norway, which affected the country’s oil and gas production. It is believed that six offshore fields have been shut, leading to a supply disruption of 79 thousand bbl/d, which is relatively small compared to Norway’s total production, which is estimated at 1.75 million bbl/d. Yet, the impact of this strike may be amplified if more workers join or if this strike lasts for a few more weeks. The production from the newly developed Norway’s Johan Sverdrup field with a capacity of 470 thousand bbl/d has not been affected so far.