The Daily Dose; Risk-on, but it’s temporary

-Hurricane threat adds to bullish sentiment

-IMF warns of a bumpy road to recovery  

Crude oil prices continued to rally early in the Tuesday session, though it had little to do with the health of the US president this time around. Hurricane Delta has already prompted some companies to shield their assets and personnel from damage. On the other side of the Atlantic, it looks like parts of the German economy are on a path toward recovery. Balancing the bullish support are concerns about the trajectory of the US economy and a return to lockdowns to stave off infections of the coronavirus. Libya, meanwhile, continues to threaten OPEC’s balancing act, but the UN isn’t convinced that all is well. And trouble continues in the Caucasus and may be spreading to parts of Central Asia.

Oil prices look to have already gained back the losses from last week, when Brent crude oil fell some 6.3%. Knee-jerkism over the past two trading days leaves us back at square one, and possibly back in the tunnel of $40-something that left traders yawning for much of September. Brent was up some 1.8% as of 8 a.m. ET to trade at $42.02 per barrel.

The expected path of Hurricane Delta takes it right through the heart of the offshore production centers in the Gulf of Mexico and the refinery hubs along the southern US coast. The US National Hurricane Center finds Delta is packing winds close to 100 miles per hour already. The storm is expected to strengthen into a major hurricane is it moves into the Gulf of Mexico on Thursday. Already on Monday, British energy company BP said it was taking precautions.

“BP has begun securing its offshore facilities and evacuating non-essential personnel from our four offshore platforms,” the company stated.

There was no data yet on how much production was idled by the storm, which is still southeast of the Yucatan Peninsula in Mexico. A handful of storms this summer left production idled and stifled refinery activity in the key PADD 3 region of the US energy market. In August, Hurricane Laura prompted the closure of seven PADD 3 refineries, idling about 2.3 million barrels per day in capacity. At its peak, Laura left 84% of the oil production and 61% of total natural gas production offline, close to the record levels from Hurricane Katrina some 15 years ago.

The International Monetary Fund on Tuesday revised its expectations on the trajectory for the global economy, noting things looked better than they did in June. IMF Managing Director Kristalina Georgieva sought to temper any irrational exuberance, however.

“The global economy is coming back from the depths of the crisis,” she said. “But this calamity is far from over. All countries are now facing what I would call “The Long Ascent”—a difficult climb that will be long, uneven, and uncertain. And prone to setbacks.”

Markets last week ticked lower on signs that hiring in the US economy was leveling off. Lackluster job growth comes as US lawmakers, distracted by partisan sniping, have been unable to make progress on a much-needed stimulus bill. The sector-by-sector destruction caused by the pandemic means some layoffs in the US economy may be permanent. That leaves major segments of the US economy offline and without the extra financial support that helped pad some of the numbers earlier this year. The European economy may be doing a bit better, however. While the services sector is under pressure, industrial orders in Germany gained momentum.

On the supply side, Libyan oil continues to land on the water at increasing rates, moving from barely a trickle to around 300,000 barrels per day. A truce of sorts between rival administrations in war-torn Libya resulted in the end of a force majeure declaration in place since January. Parties to an OPEC-led effort to balance the market through coordinated restraint will need to consider those extra Libyan barrels when they meet again. But Libya isn’t out of the woods quite yet. Stephanie Williams, the acting UN special envoy to Libya, said foreign meddling in the country was knee-capping chances for a long-term political recovery. The risk of miscalculations, she said, could pose a threat to regional security.

“There are nine countries that are intervening in the Libyan conflict,” she said. “They all need to stop the breaches of the arms embargo.”

Another 300,000 bpd may be offline due to strikes among Norwegian oil workers. Norwegian production, however, was about 300,000 bpd higher year-on-year in August, the last full month for which data are available, so output is essentially even. On the mood in general, a note from oil broker PVM emailed to The GERM Report found many of the supportive factors, like the Norwegian strike and the threat from Hurricane Delta, are temporary factors. Once those issues pass, it could expose the fragility of the global economy and impact demand for oil going forward.

In international issues, conflict continues to pit Armenian allies against Azeri supporters in the conflict in the enclave of Nagarno-Karabakh. While not yet a direct threat to oil supplies, the conflict is dangerously close to the networks drawing oil from the vast riches in the Azeri waters of the Caspian Sea. Russia, which sides with the Armenians, made a land grab in Georgia in the mid-aughts that had a real impact on the flow of oil and that situation could happen again. Meanwhile, one person was killed on protests in Kyrgyzstan over contested parliamentary elections. While landlocked and not a major oil producer, we wonder if the global mood of discontent could raise the geopolitical risk premium as the pandemic deepens.


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