The Daily Dose; Demand Is Not Quite Ready for Prime Time

-Pre-pandemic demand is on hold

-Investment trends hint at future shape of US government  

Supply-side issues by way of Libyan oil gave way to positive demand signals from China to give the price of oil a boost in early morning trading. The resumption of activity at the Sharara oil field, Libya’s largest, offset some of the concerns about idled production in the Gulf of Mexico. In the United States, early indications suggest the odds are against the president in his bid for a second term, leaving some investors to ponder greener futures. In China, meanwhile, not only is oil demand on the rise but so too are vehicle sales. Europe too offered a silver lining with more economic relief options. While we wait for the OPEC market report, it looks like the IEA is worried about long-term demand. And in the geopolitical arena, we may see more impacts from the Arab Pivot as Israel and Lebanon begin talks over disputed maritime borders.

Brent crude oil lost about 2.6% in value in Monday trading as the negatives outweighed the positives, pushing the benchmark back into a tunnel between $41 and $43 per barrel. Trading in the previous session was thinned by federal holidays in the United States and Canada. Positive demand signals from China and some possible dip-buying helped drive a rally in early Tuesday trading, with Brent up some 2% as of 8 a.m. ET to trade at $42.56 per barrel.

OPEC has a Libya problem. We’ll see later in the morning where production stands once OPEC releases its latest monthly market report, though the steady increase in Libyan barrels on the water jeopardizes its long-term efforts to balance the market. After a tacit handshake between rival governments last month, October brings the potential of another 350,000 barrels of oil per day from the Sharara field in the west of the country. Saudi Arabia, the de facto kingpin of the producer group, has suggested it would put plans on hold to ease back on voluntary cuts in January, though that may be too little too late for the market. Compounding the supply-side issue was the end to strikes in Norway that threatened to sideline as much as 1 million barrels of oil equivalent.

Adding to the supply-side problem is the steady return of production in the US Gulf of Mexico. Hurricane Delta, which made landfall last week as a category 3 storm, sidelined nearly 92% of the oil production from the US waters of the Gulf of Mexico. The US federal government found in its latest storm assessment that all of the dynamic rigs that moved out of the storm’s path are back in position. Production is returning swiftly, with Monday’s survey showing some 70% of oil production still offline.

In the United States, the Republican party has an election problem. A composite of national surveys from Real Clear Politics found former US Vice President Joe Biden with a 10-point advantage in the court of public opinion over President Donald Trump. According to forecasters at the popular FiveThirtyEight site, Biden has an 88% chance of winning. Their forecast shows Biden winning the key battleground states of Ohio, Florida, Pennsylvania and Michigan. Keen on imprinting Trump’s conservative brand of public policy, Republicans are almost certain to put Judge Amy Coney Barrett in the nation’s highest court. At issue, however, is that most of the darling agendas on the conservative wish list – curbing abortion rights, ending subsidized healthcare plans, delegitimizing same-sex marriage – are deeply unpopular among the US public. That is having real implications on the potential makeup of the US government. FiveThirtyEight finds a Democrat is likely to win the presidential election, Democrats are almost certain to hold the House of Representatives and they have a shot at taking the Senate. In confirmed, the 48-year-old Barrett would likely be the last, but an enduring, representative of the conservative agenda.

For commodities, that means green energy options are becoming attractive. Most major oil companies have embraced renewables this year, but that was less political and more to do with the weak demand for petroleum products during the pandemic. Remember that Trump pulled out of the Paris climate agreement, leaving petroleum as an attractive option. An op-ed from the Bloomberg news agency, meanwhile, suggests Big Oil should bet on Biden and a possible green agenda now rather than see their hand forced in the future.

Elsewhere, there are signs the global economy may be turning around as the world acclimates to life under quarantine. Non-farm payrolls in the United States remain suppressed, though manufacturing is showing signs of life. The bleak payroll outlook in the United States, however, is a net negative as US lawmakers focus on their leads in the polls rather than leadership on a new round of stimulus. On the other side of the Atlantic, however, the European Commission on Tuesday extended support mechanisms for member states. China, meanwhile, still has a strong appetite for crude oil and auto sales are on the rise. Nevertheless, in its baseline scenario, the International Energy Agency found demand likely won’t return to pre-pandemic levels until at least 2023.

On the international stage, long-time foes Israel and Lebanon are set to discuss disputed maritime borders on Wednesday. We’ve commented at length how Israel may feel emboldened by the normalization of relations with Arab nations. Lauded as a breakthrough for peace by its orchestrators, the so-called Arab Pivot may actually be destabilizing given that Israel secured a win despite abandoning the Palestinian cause, leaving it free to grab Palestinian territories. For commodities, a border agreement would bring much-needed revenue to Lebanon given the vast resources available in the Mediterranean Sea. Lebanon is in a swift decline after an August blast at the port at Beirut left nearly 200 people dead and damaged a significant portion of Lebanon’s already crumbling infrastructure. Lebanon needs a win here. But Israel too has significant natural gas resources of its own and we wonder if Lebanon will be on the losing end of the deal given its desperate position at the bargaining table. Israel has nothing to lose.

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