The Daily Dose; Big Economies are Faltering

-China may be the only bright spot in the market

-Norway shows BP was wrong.  

Crude oil prices were unable to breakout in the previous session and now look to finish the week lower by about 3% for Brent, the global benchmark. There were flickers of optimism on the investment front as Norway had a decent showing at its latest offshore offering. China, meanwhile, is buying again, though India is clearly slowing down. Supply-side pressures and lackluster demand, however, are catching up with the market. In the United States, the financial press was brushing off word of another round of federal stimulus, with 38 days to go before the presidential election. On the supply side, tankers continue to line up off Libya, while Iraq continues to cheat on its OPEC obligations.

Two straight days of steady-eddy trends for oil masked an otherwise down week for commodities. That suggests last week’s surge was overdone, particularly as the onset of cooler weather in the northern hemisphere dampens demand. After a couple of quiet days, the price for Brent crude broke through the flatline to move lower by 0.50% as of 8 a.m. ET to hit $41.73 per barrel.

French supermajor Total, US supermajor ConocoPhillips and Norwegian powerhouse Equinor were among the three dozen or so applicants for licenses on the Norwegian continental shelf. Production from Norway in July, the last full month for which data are available, was 1.74 million barrels per day, more or less in line with expectations, but a staggering 28% higher than the same time last year. Much of the progress can be attributed to the start of the Johan Sverdrup oilfield, though the government estimates only half of the potential offshore has been realized. Norwegian Energy Minister Tina Bru said the interest was a testament of faith in the long-term future of the Norwegian shelf.

“We have received a large number of applications, and this is important in order to make discoveries that will contribute to long-term value creation, employment and state revenues,” she said in a statement.

After BP notoriously claimed The End of Oil, the interest in Norway suggests otherwise. The energy sector, faced with resilient demand destruction during the pandemic, has put its green foot forward, though the commitment will be tested once oil prices recover along with the rest of the economy.

Norwegian hopes for the future were supported by short-term factors as well. China, which has been spared from the quarantine economy in relative terms, has seen an uptick in auto sales. In a show of confidence, the world’s second-largest economy is hosting an international auto show during the weekend, hoping to draw in interest from foreign and domestic players alike. With the market focus looking to mobility data for signs of economic health, any increase in new-car sales is equally indicative of modest recovery. Also lending support to Chinese health are indications that its appetite for liquefied natural gas is growing. Analysts expect Chinese imports of LNG to jump some 10% from last year, though Chinese import levels are somewhat misleading. Bargain hunting prompts China to stock up on supplies, a trend that’s been seen in storage levels for crude oil. To accommodate the boost in LNG, meanwhile, China is cutting back on piped natural gas. That said, gas import levels show the Chinese industrial sector may be back to firing on all cylinders.

But China seemingly stands alone. Government data from India show refiners processed some 3.82 million bpd of oil last month, nearly 10% lower than in July. Refinery capacity in August, meanwhile, was around 76%, compared with 83% in July. Economists at the Organization of Petroleum Exporting Countries revised their forecast for economic growth in India lower, from negative 4.6% to negative 6.2% for the year.

India is very much embattled by COVID-19, having entered the pandemic in an already fragile situation,” OPEC stated in its latest monthly report.

With its tally of some 5.7 million cases, India trails only behind the United States in terms of infections of the novel coronavirus. But India is nowhere close to the rates in the United States, for now the world’s largest economy. A tally from the Reuters news service finds infections in the United States have topped 7 million as the response to the pandemic is a political factor. Finding political affiliation in the United States is almost as easy as finding those people who won’t wear a mask to protect against infections. Ten of the 50 US states have posted record-level infections so far in September. And after a good summer bounce, the US economy is turning south. Hiring has sputtered out and US Federal Reserve officials say there’s not much more they can do to prop up the economy. After tacitly giving up on the prospect, US House Speaker Nancy Pelosi and US Treasury Secretary Steven Mnuchin were in talks about reviving a stimulus effort. But with hyper-partisanship on display as the election draws near, we feel it’s highly unlikely that US lawmakers will find much to agree on between now and January.

Supply-side pressures, meanwhile, remain. Tankers continue to move toward Libyan ports after rival political administrations agreed to let oil flow again, ending a logjam in place since January. Some vessels laden with Libyan crude oil may already be heading to Europe, which tends to like the lighter crude from the North African producer. Now Shell is getting in on the game, booking a tanker to load some 1 million barrels of oil for discharge in Singapore in late October. At its peak, Libya can churn out some 1 million bpd, and while it has a ways to go to reach that level, the return is problematic for OPEC’s effort to balance the market. And it seems the Saudi pressure on cheaters had little impact. Already lowering its official selling price, Iraq seems to be booking more cargo for October. While there are some flickers of hope, most of the short-term factors indicate a big move upward for oil is unlikely for now.

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