The GERM Report

-Do Libyan barrels have any place to go?

-The market is stuck between a rock and a hard place.  

Traders were buying the dip in early morning trading after crude oil suffered major losses in the previous session. The specter of the possible return of Libyan barrels on the water and last week’s rush made it something of a seller’s market on Monday. The onset of cooler weather in the northern hemisphere and tighter lockdowns in some major economies could dampen demand going forward, limiting some of the upward potential for commodities. Expectations of another draw on US commercial crude oil inventories, however, could be supportive. And there will be no shortage of snippets from US Federal Reserve officials in the financial press today. Elsewhere, and the show must go on at the UN General Assembly, and it is indeed a show. Iran, which offered an olive branch of sorts on Monday, will take the virtual stage to rally against alleged bullying by the United States.

The price for Brent crude oil managed to pare some gains in trading on Monday, though it still finished the session down some 4% on the day. The market was mixed early Tuesday, with Brent still in the October contract and West Texas Intermediate moving to November. WTI was up some 0.66% to $39.80, while Brent was lagging behind at a 0.56% gain to hit $41.67 per barrel as of 8 a.m. ET.

The Brent trade structure shows oscillation around $42 per barrel as traders struggle to determine market direction. A contango situation indicates the market remains oversupplied and demand is uneven. China’s economy has been relatively resilient against the pandemic, though that’s not necessarily the case elsewhere in the world. With additional federal stimulus efforts in the US economy standing a snow ball’s chance in hell, data on home sales, the largest investment a US taxpayer will usually make, could be a disappointment. Reflecting on the many challenges facing OPEC, Amrita Sen at consultancy Energy Aspects told the Financial Times that market wobbles were reflective of uncertain times.

“Asian demand — a key destination for Middle East oil — is broadly picking up, but consumption in the West is going the other way,” she said. “It’s so difficult to forecast anything.”

Crude oil prices moved sharply lower in the previous session on signs of a breakthrough of sorts on the simmering civil war in Libya. Rival administrations seem to have come to an agreement on who gets what slice of the oil pie in Africa’s largest producer and OPEC member. Libyan output, according to secondary sources reporting to OPEC economists, is at a mere trickle, though fourth quarter 2019 levels were close to peak capacity, at around 1 million bpd. It’s unclear how much of that Q4 output was condensate, though the lighter crude makes it attractive in a European economy relatively open in terms of OPEC competition. US energy company Hess Corp. is expected to pick up a cargo of crude oil for European delivery this week and the nation’s National Oil Corp. said late Monday that an increase in overall output was imminent. The Libyan return spells trouble for a bloated market and the onset of fall in the northern hemisphere means some of those barrels will have no place to go. Already facing a tough economic road ahead in a messy divorce from the European Union, British Prime Minister Boris Johnson is tightening down on restrictions in order to curb a second wave of coronavirus infections. Estimates show the clamp down could erase a year’s worth of growth for the British economy.

In the US market, Robert Kaplan, the head of the Federal Reserve Bank in Dallas, said he expected the economy to run hot, though much of his optimism was pegged on hopes for continued job growth and public health. Those hopes may be misplaced, however. A tally from The New York Times finds the number of new cases in the United States spiked some 15% over the last 10 days and the country remains far behind the rest of the world in controlling the pandemic.

“The US continues to be among the most vulnerable countries, because it never crushed the spread of the virus after the original outbreak,” its morning newsletter read.

With rates still at zero, the US Federal Reserve is running out of ammo, leaving it to a deeply divided Congress to try its hand at fiscal support. But in an election year, and with the November vote right around the corner, a new stimulus check is unlikely. Critics of the right-wing administration of President Donald Trump have quipped that if leaders were as adamant about voting on a replacement for late Supreme Court Justice Ruth Bader Ginsberg as they were about economic or health support, the general mood would be much, much better. But it’s not.

Also not better is the mood on the global stage. We’ve noted at length that the Arab pivot toward Israel makes the line between friend and foe distinctively clear in the Middle East and Central Asia. Iran on Monday called for a full prisoner swap with the United States, though we must view that offer through the lens of Tehran’s penchant for diplomatic resilience. Perhaps Tehran sees the US in a weak position, given Trump’s uncertain road to re-election, and is hoping to play to his need for the spotlight with the exchange. The walls, however, continue to build up around the Islamic Republic, with Sudan and possibly even Saudi Arabia next in line for Israeli normalization. US military favors for Arab states, however, could be unsettling for some under the Israeli umbrella. And outside the US perspective and its isolationist policies are not winning any support. China, a permanent member of the UN Security Council, joined the European Union by saying the United States has no right to impose sanctions on Iran via the world body because it’s no longer party to its agreements on Iran. On the flip side of the dynamic and there may be some opportunity for Iran to entrench its influence in the Shiite Crescent, as the Lebanese president pleads for reform. We could get a glimpse of the international community’s taste of US unilateralism during the speeches at the UN General Assembly. Much has been said about the unraveling of the liberal order given the rise of nationalism. While it may be controversial to hold out Iran as a voice of reason in any capacity, a possible call for multilateralism may indeed resonate among the world body.