The Daily Dose; Brent is in Correction Mode

-Demand concerns finally catch up with commodities

-Were cheap gas and complacency enough to put US drivers in a holiday mood?

Demand concerns are putting pressure on the energy market, with Brent threatening to drop below the $40 per barrel mark in early trading on Tuesday. Demand becomes a particular issue in the US economy, with the long holiday weekend marking an unofficial end to summer. Low retail gasoline prices and a complacency may have brought some demand back for products in the US economy, though those gains will be temporary. Elsewhere and jet fuel is building up in the European market, while China eases back from its recent buying spree. Meanwhile, there are security dilemmas abound in the international arena, where one wrong move can set off a dangerous chain of events.

Brent is officially in correction mode, shedding just over 10% of its value during September. Lackluster demand and ill-timed OPEC liberation leaves the market off balance. Contagion may be setting in on Tuesday, with the global benchmark for the price of oil down some 3% as of 8 a.m. to trade at $40.61 per barrel.

There are some early data on US consumer gasoline consumption during the long Labor Day holiday weekend that show modest gains in demand from the previous week were offset by modest declines. Week-on-week comparisons, unfortunately, do little to tell us about the health of the economy relative to last year, before the pandemic. Cheering data points from 2020 ignores the fact that this may be the worst global contraction since the Great Depression. The last data points we have show us that total products supplied, a proxy for demand, down 15.9% year-on-year for the four-week period ending Aug. 28. And retail gas prices still look a bit high, all things considered. Motor club AAA finds a national average retail price of regular unleaded gasoline at $2.22 per gallon, about 13% lower than the same time last year. Brent crude oil, meanwhile, is nearly 40% less than it was at this point last year. With health and economic constraints in abundance, it seems gas prices might not be low enough to incentivize major travel in the United States.

The end of the summer driving season in the United States coincides with an end to the buying spree in China. Independent refiners, known commonly as teapots, are at or near their quotas, suggesting the Chinese appetite will be muted in systemic fashion. While Chinese oil imports are up some 13% relative to last year, that’s something of a false positive given the propensity to buy cheap oil and put it into storage. That storage would draw down if Chinese demand was relative to what its economy needs. That does not appear to be the case. According to economists at ING, “sizeable fresh Chinese buying appears to be absent from the market at the moment.” If China is not drawing on storage, it is no longer really in a buying mood.

Europe isn’t in a very good economic mood either. Eurostat, the record-keeping arm of the European Union, reported its revised reading of second-quarter GDP showed a 11.8% contraction for the countries that use the euro currency. That’s a slight improvement from its initial reading, but still the sharpest economic contraction since record-keeping began in 1995. And lest we forget, the economy in general was already slowing down at the start of the year, in part because of the headache triggered by the Sino-American trade war. Eurostat noted that first quarter GDP contracted by 3.7% in the euro area. Household spending is down substantially, and we can see some of that in floating storage levels for diesel and jet fuel in the European economy.

Elsewhere, there is not shortage of risk on the global stage. Much ink has been spilled on Turkish ambitions in the Mediterranean, while French President Emmanuel Macron tries his hand at international architecture ahead of elections in 2022. Observers of international observers believe that conflict between the United States and China is a given because it fits in nice with the parable from Athenian historian Thucydides; that the ascendancy makes those in a superior footing nervous. That, in turn, can lead to war. But one country is always someone else’s China. That’s proving true on the border with India and China, where the rise of India is making China nervous. Security dilemmas are abundant, and exacerbated by pandemic tensions. In the international system, actions taken by a state to heighten its security prompts its adversaries to do the same. That leads to increased tensions that create conflict, even when no side really wants it. Wars, by that logic, can easily break out by mistake.

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