The Daily Dose; The Market Mood is Sour

-Brexit just got messier

-US oil majors pumping money into the coffers of Trump’s opponents  

Supply and demand factors battled it out in the previous session, with Brent staving off a major crash to reclaim at least some of the losses. That, however, leaves the global benchmark for the price of oil stuck in the same ol’ tunnel of between $43 something and $41 something a barrel, a band in place since the middle of September. We’re expecting crude oil prices to take a hit now that divorce negotiations between the United Kingdom and the European Union are breaking down. For the oil sector, we’re seeing hints of the market mood on the US elections and more financial damage from the quarantine economy. In the geopolitical arena, the US diplomatic machine may be looking to re-engage the world, while trouble in the Caucasus continues to rage on.

Brent was posting narrow losses in overnight trading, but took a turn for the worse after word of a possible no-deal Brexit emerged at around 7:15 a.m. ET (12:30 p.m. London). Losses among big energy companies too added to the weak sentiment early in the day. Brent was down some 1% as of 8 a.m. ET to trade at $42.72 per barrel.

British Prime Minister Boris Johnson dropped a bombshell by announcing the United Kingdom must now face the prospect of leaving the EU without a formal agreement on future relations.

“And so with high hearts and with complete confidence, we will prepare to embrace the alternative and we will prosper mightily as an independent free trading nation controlling our own borders, our fisheries and setting our own laws,” his statement read.

With German Chancellor Angela Merkel and EU commissioners urging the prime minister not to abandon talks over the divorce agreement, Johnson instead turned the tables by saying it was the continental leaders that have “abandoned the idea of a free trade deal.”

A report from the Institute for Fiscal Studies finds British GDP would be about 2.1% lower next year than it would be if the United Kingdom stayed closer to the EU, setting things up for recessionary strains. Without a deal, trade barriers could put the British economy at a 13% disadvantage to the EU. With the demand destruction caused by the pandemic, and on the cusp of a second wave of infections, a messier Brexit only adds insult to injury.

Some of the economic malaise is apparent in the energy sector. Big oil companies have already posted major losses in quarterly statements this year, particularly after the bite of April negativity for the price of oil. Ridiculed in some circles for calling an end to oil in a policy statement from earlier this year, British supermajor BP is doubling down on redundancies. Cutting costs in an effort to green up, a report from the Reuters news services finds only about a quarter of the planned 10,000 in layoffs will be voluntary. Legacy assets will still keep producing petroleum, so we’re not necessarily seeing a supply-side issue for the company’s transition, though it does set the mood a bit.

“We know that for some people for various reasons they feel that now is the right time for them to leave BP – but for many it will still have been a difficult decision,” a memo seen by the news service read.

On real supply-demand grounds, results from oilfield services company Schlumberger were equally bad. Year-on-year, the company posted revenue for the third quarter down 38% from the same period last year. Things were worse for the company in North America than in its international plays. And reading the tea leaves in the race for the White House, oil majors Chevron and Exxon Mobil seem to have pumped more money into the Democratic party. A President Joe Biden would likely turn the page on the US oil sector, setting the nation back on a green agenda by rejoining the Paris climate accord. That likely won’t mean the end to US shale, but considering the pro-oil policies under President Trump, it might feel that way.

In more signs of how the pulse of the election is feeling, former US Ambassador to Iraq Ryan Crocker is on record saying threats from US Secretary of State Mike Pompeo to close the embassy in Baghdad would be “incredibly irresponsible.” We’ve noted at length that US foreign policy under Trump is rather isolationist, with the president leaning on others to do the heavy lifting. Biden in a town hall meeting Wednesday night said Trump’s Make America Great agenda had made America alone. The Trump administration, Biden said, had “no coherent plan for foreign policy.” Abandoning Iraq would open the door to Iranian ambitions in the region and likely cede some control over oil and shipping lanes to US adversaries. We’ve already seen that Iran can disrupt the market, sometimes severely.

While likely baked in at this point, we can’t ignore the conflict in the Caucasus. Fighting continues over the disputed territory of Nagorno-Karabakh, pitting Armenia and its allies against Azerbaijan and its allies. Like the map before World War I, the overlapping I-have-your-backs makes the region something of a powder keg for greater conflict.


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