The Daily Dose; Brent has Work to Do

-North American oil prospects are fading

-OPEC+ has some tough homework over the weekend.  

Brent crude oil was unable to hold up a strong defense for $40 per barrel on supply-side pressures and weak prospects for a sharp economic recovery. A miss on gross domestic product in the British economy was compounded by the difficult road in leaving the European Union. In the oil patch, North American producers are looking to shed assets that were once a bright spot for new output. OPEC ministers meet next week, meanwhile, and not only will output be assessed, but legacy cheaters such as Iraq must be dealt with. Libya too could enter the discussion given recent political breakthroughs. Elsewhere, there remains hope that diplomacy still works as tensions ease on the shared border between China and India.

A surprise build in US commercial crude oil inventories and the end of stimulus hopes for the world’s largest economy put pressure on the market in the latest session. For the week, Brent is on pace for a loss of around 7% on fading hopes for a V-shaped recovery. Losses may be contagious, though Brent is trying to cling to the $40 threshold. The global benchmark for the price of oil was down 0.4% as of 8 a.m. to hit $39.89 per barrel.

The British government reported its economy grew for the third straight month in July. Like China, the British were in a buying mood, with car sales exceeding levels from before the pandemic. To no real surprise given the propensity for a pint, pubs too helped prop up the economy. The bounce, far in the rear-view mirror at this point, was a prelude of sorts given the stubbornness of the pandemic. The three-month average for British GDP was lower than expected and Director of Economic Statistics Darren Morgan warned against getting too excited.

“All areas of manufacturing, particularly distillers and car makers, saw improvements, while housebuilding also continued to recover,” he said. “However, both production and construction remain well below previous levels.”

The economic pressure is compounded by the difficult road out of the European Union. The British government set up roadblocks thwarting its own departure by making a last-minute appeal to change the terms. British Prime Minister Boris Johnson has argued that new changes would protect the peace process for Northern Ireland and ensure the soft border with the republic remains open. Frustrated with the lengthy process, the EU said enough was enough, calling on the Johnson premiership to stick to the plan. Trust, EU negotiators said, was in serious jeopardy and trade in the continental economy could be impacted.

Elsewhere, life at $40 per barrel is clearly uncomfortable for many North American producers. A handful of smaller shale companies in the United States filed for bankruptcy earlier this year. Further north and Western Canadian Select, the country’s benchmark price for oil, is down some 4.4% in morning trading to $29.68 per barrel. Largely landlocked apart from arteries through the United States, Canadian oil has been underperforming compared to its peers. In the Montney oil and gas basin near Canada’s western coast, companies are looking to shed assets or join forces in an effort to preserve capital. And like the United States, that not only impacts oil output, but threatens long-held ambitions to get liquefied natural gas to the Asian economies. With no place to go, and with demand dwindling, the North American prospects do not look good.

Not much looks good for OPEC either. Qatar Petroleum, the state-owned enterprise, followed the trend set by its regional counterparts by lowering the official selling price for October loadings. Demand concerns mean it’s time for bargains. For all intents and purposes, it looks like the parties joined together in the OPEC+ group relaxed too early. Floating storage levels show oil in some ways is better off just sitting around, though market share is still desirable. Iraq, OPEC’s second-largest producer, wants an exemption. Cheaters such as Iraq were to make up for their lack of discipline, but the lower-for-longer situation is taking its toll on a country that depends on oil exports for nearly all of its state budget. Libya, meanwhile, has moved from black swan to albatross and recent peace efforts could eventually put more barrels on the water. Saudi Arabia, for its part, has signaled it may be over shouldering the burden, so the dozen or so producers trying to balance the market have some tough homework to do over the weekend.

The decline of the United States, worries of renewed conflict in a troubled Lebanon, Turkish neo-Ottoman ambitions and the ever-present cyber threat from Russia paints a decidedly grim picture of the international arena. The GERM Report has noted before that India and China are in the same risky security dilemma as are China and the United States. Ascendancy makes dominant powers nervous, and China is on both sides of the equation. India and China had tried peace before, though recent conflicts have been the worst in decades. Now, a five-point peace plan holds promise to defuse the tensions. Nationalist trends could still rule the day, but for now the guns are silent.


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