The Daily Dose; Demand is Dead. Long Live Demand

-Trading houses aren’t that optimistic

-European energy security may be at risk.  

Crude oil prices were riding on the coat-tails of equities in the previous session, though looked to be paring some of those gains in early-morning trading. The market got a bit of a boost on the re-introduction of a US stimulus package, though the odds of any meaningful legislation passing this close to the election are slim. It could be a bit of a down day in general as the pandemic passed a bleak milestone with more than 1 million people infected by the novel coronavirus. Elsewhere and the big trading houses are calling for a nothing burger in price direction over the coming months. To firm up the point, it looks like Saudi Arabia will stand pat on an already-low official selling price. Looking beyond the fundamentals and tensions continue to run hot in the Middle East and Central Asia.

Equities bounced yesterday and, lacking any real reason to move, dragged commodities with them. The smart people in the room, however, were saying not to get too excited about the prospects for a long-term bull run. Traders have largely abandoned the November contract for Brent and the price point in December was down some 0.6% to hit $42.61 per barrel at 8 a.m. ET.

With leads like these, who needs real economic data? The New York Times summed up the optimism surrounding the latest effort to put more money into the US economy by way of another round of stimulus checks and amped up unemployment insurance. Beneath the main headline, the Times noted this “appeared to be the most concrete action toward more economic aid since negotiations stalled nearly two months ago.” If you left it there, there was cause for hope. But with 34 days until the election, and with the first round of the top-ticket debates set for Tuesday night, major party leaders will be busy cheerleading rather than actual leading. In other words, don’t hold your breath.

With the 1 million mark passed in the pandemic, it seems the conversation is no longer about demand destruction, but how low and for how long demand will remain suppressed. Economists at the financial firm ING recently lowered their forecast for Brent for the fourth quarter from $50 per barrel to $47 per bbl. Trading house Vitol too suggested a run on $50 was unlikely. Vitol’s chief Russel Hardy joined the crowd in questioning BP’s call for peak oil and said it probably won’t be next summer until things start to flirt with normalcy. Much ink has been spilled in the financial press about the record-breaking trends in economic indices, but it’s easy to post records given the incredibly low bars set earlier this year. Oil broker PVM, in a note emailed to The GERM Report, said the market is likely past the spike in demand that normally coincides with holidaying and summer travel in the northern hemisphere. From London, analysts there pointed to a lot of questions about demand going forward, but with the pandemic showing no quarter, suggested there won’t be much news on the positive side of the coin.

In Europe, sentiment created something of a false positive. The economic sentiment indicator for the countries that use the euro improved from 86.8 to 90.2 in September. At first blush, that shows improvement is entrenched, but the pace of recovery is slowing down. That’s not good for the fourth quarter.

“Today’s economic sentiment indicator indicates that the eurozone economy is already showing signs of rebound fatigue in September and second-wave worries add to expectations of further slowing of economic growth,” economists at ING wrote Tuesday.

The conversation around the proverbial virtual water cooler is that it’s been a snooze fest for crude oil prices over the last week or so. That said, Brent is on pace for a loss of about 6% on the month, but that doesn’t resonate much during a month where day-to-day swings have ranged from 4% gains to losses of 5.3%. But it seems like we may be stuck here for a while. Saudi Arabia set the trend among OPEC producers by recently lowering the official selling price for its crude, setting off a bit of a fight over market share. A survey from representatives in the Asian refining sector by the Reuters news service finds that Saudi Arabia is likely to keep its price for November loadings where it stands.

In the realm of geopolitical risk, the simmering conflict in the disputed enclave of Nagorno-Karabakh is apparently having a direct impact on energy. Armenia has the short end of the stick in terms of influence on the global commodities market, but the flip side is that Azerbaijan faces significant threats to its assets. Some of the largest oil and gas fields in the world are situated in the Azeri waters of the Caspian Sea. Many of those fields feed the European economy and the head of Azerbaijan’s state energy company said the conflict was dangerously close to its riches. The good folks at Argus quote the head of the State Oil Company of Azerbaijan Republic as saying its ”strategic pipelines [are] situated in close proximity to the war zone.” This is as grave as a threat to energy security in the European economy as trouble in Ukraine.

To Azerbaijan’s south, and we expect Iran to try to upset the apple cart given the growing wall of financial and geopolitical containment strategies at play. The so-called Arab pivot makes the line between friend and foe clear in the region, ripening the prospects of a security dilemma in the region given the US military favors involved. The United States is now trying to cut Iran off from the international economy completely. The latest move could target Iran’s banks, leaving it effectively alone in the world. Iran, however, may be better at cheating than playing by the rules. But if sanctions cut Iran off, we would expect Iran to move deeper into the rogue column. Sanctions are indicative of power, though growing US isolation could dampen the impact. That said, we would not be surprised to see the Iranian hornets start to sting given the constant poking from the United States.

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