The GERM Report

-Profit-taking may be in play

-Markets shrug off Hurricane Delta  

Crude oil prices were moving in negative territory after already-fading hopes for a US stimulus package ended. That came after warnings from the top bank official about necessary support. Across the Atlantic, meanwhile, and there are signs the European economy may be facing some headwinds. And while a major hurricane in the US Gulf of Mexico could upend supplies, we’re seeing signs that OPEC members continue to add to the supply-side strains. That mood could change, however, late in the day when markets review minutes from the US Federal Reserve. On the international stage, we continue to see signs that conflict over the enclave of Nagarno-Karabakh may take collateral damage.

Two-straight days of a major rush in the price of oil may have triggered some selling behavior in Asian trading. An abrupt end to US stimulus hopes and signs of a build in commercial petroleum inventories made the case for the bears early in the Wednesday session. The price for Brent crude oil was down 2.06% as of 8 a.m. ET to trade at $41.77 per barrel.

US Federal Reserve officials spent the last few weeks warning they were running out of ammunition to prop up the largest economy in the world. Hiring in the United States seems to have leveled off, and a return to lockdowns given the high rate of infections of the novel coronavirus will only add to the economic strain going forward. Speaking remotely, US Federal Reserve Chair Jerome Powell told the National Association for Business Economics that the US economy needed support.

“A long period of unnecessarily slow progress could continue to exacerbate existing disparities in our economy,” he said. “That would be tragic, especially in light of our country’s progress on these issues in the years leading up to the pandemic.”

Markets had, falsely we believe, pegged hopes on another round of stimulus from US lawmakers. We saw that as highly unlikely this close to the election as the partisan sniping only intensified. Seemingly fading in the court of public opinion, US President Donald Trump tried to blackmail the voting public by saying there would be no further talk about a stimulus until after the election. We see that as a political mistake. Passing a stimulus now would give Trump and his Republican loyalists further support for their claims that it’s their actions and their actions alone that have supported the US economy thus far. Trump, however, did say he was ready to sign off on a stand-alone package that would send $1,200 in stimulus checks out to US taxpayers.

In Europe, the British divorce from the continent could get nasty for the region’s economy just as the pandemic clamps down again on progress. Germany, a bellwether of sorts, saw some glimmers of hope recently, but its latest reading on industrial activity was a disappointment.

On commodity-specific news, the American Petroleum Institute reported an unusual build in commercial crude oil inventories to the tune of 951,000 barrels, though gasoline and distillate inventories moved in the opposite direction. Data over the next couple of weeks will be skewed by the impact of Hurricane Delta, which is bearing down on the production and refining centers in and around the Gulf of Mexico. Delta’s path is showing a direct hit to oil and gas centers in the region. The US Bureau of Safety and Environmental Enforcement finds about 30% of US offshore oil production and 9% of the gas production is already idled by the storm. Information from S&P Global Platts emailed to The GERM Report finds about two dozen refineries could be impacted by Hurricane Delta.

The market seems to be shrugging off the impact of the storm early in the session, however. Supply-side strains seem to be continuing, meanwhile. We noted that OPEC producers Saudi Arabia and Iraq had already lowered their official selling price for oil loadings from October as they sought to incentivize bargain hunters. Sources speaking to the Reuters news agency said Saudi Arabia may be reverting to first-quarter behavior when it was in a fight for market share with Russia. According to reports, Saudi Arabia intends to up its production capacity from 12 million barrels per day to 13 million bpd. To keep up, it looks like oil behemoth Saudi Aramco is dumping assets. Iran and Venezuela, for their part, seem to be finding a lot of common ground under a US containment strategy and managed to put more barrels on the water despite the financial pressure.

There may be some heightened volatility today given the data coming in from the EIA and the release later in the day of minutes from the Federal Open Market Committee. And then, of course, there’s the Thursday release of OPEC’s latest assessment of the market in 2020. In international affairs, we have the continued fight over the development of the second string of the Nord Stream natural gas pipeline from Russia through the Baltic Sea to Germany. Once seen as a boost for European energy security, it’s now a controversial development given the rise of LNG, US and otherwise, in the European market. Poland is now suing Russian energy company Gazprom for building the second string in its waters without approval.

In conflict news, the threat of a spillover from the conflict between Armenia and Azerbaijan continues. Some of the world’s largest oil and gas networks run alarmingly close to the conflict zone, but supplies have been spared so far. That could change if things escalate any further, however, and displacements are already becoming a concern. The fighting in the Caucasus brings in a myriad of rivalries, from Turkey to Russia. Now Iran is getting in the game. Some of Iran’s electricity derives from the Caucasus and Tehran is getting anxious. Speaking of a possible accidental strike on its interests, Iranian government spokesman Ali Rabiyee was appealing for calm.

“Iran is one of the few actors which enjoys good ties with Azerbaijan and Armenia and wants the war to end as soon as possible,” he was quoted by the semiofficial Fars News Agency as saying.