The GERM Report

-Commodities giveth and taketh away

-Russia pours cold water over OPEC-led curtailments  

We commented Tuesday about a note from London oil broker PVM that stated the trend in crude oil prices suggests traders may as well flip a coin. The broker was right. Crude oil prices shot up in the middle of the previous session, only to erase all of those gains overnight. A perfect storm of negativity is building over commodities. Libya continues to advance, both in terms of peace prospects and oil production. Trouble in Nigeria is escalating, so there may be a developing risk premium. But we’re not sure about the durability of the OPEC-led curtailment agreement and it looks like, as we’ve been expecting, that US stimulus talks are kaput.

The commodities market giveth and it taketh away. A surprise build in US commercial crude oil inventories reported by the American Petroleum Institute took the wind out of the market’s sails, though we’ve questioned how much inventories really mean lately given the impact of the busy Atlantic hurricane season. The market mood turned south, though, with Brent trading down some 1.6% as of 8 a.m. ET to hit $42.44 per barrel.

PVM in a note emailed to The GERM Report on Tuesday stated that it’s view of the market was one of randomness.

“Last week, for example, Brent moved only 0.19% higher, despite early-week volatility,” we wrote. “PVM states that, if you’re betting on oil lately, you may as well flip a coin.”

That’s certainly been the case so far this week. It’s been up and down again for some time. Brent is higher on the week, though we wonder how long that will last given the negative signals coming in on Wednesday. China started us off this week with a good reading on GDP, though it looks like crude oil demand is softening a bit. As the only economy with any chance of reporting net positive results on the year, that’s particularly troubling for traders looking for support in commodities.

For producers, a tacit truce between rival governments in Libya looks to be on the verge of becoming official. Acting UN special envoy to Libya Stephanie Williams said two days of talks between the two Libyan delegations have led to a breakthrough. Both sides have agreed on a variety of measures, from an end to the fighting to who guards the oil. The handshakes today, she added, will lead to a formal cease-fire agreement.

Libya, as we’ve stated for much of the year, has turned from black swan to albatross. Production more or less ground to a halt early this year because of fighting between the rival administrations. Force majeure declarations were lifted in September, and October has seen the resumption of production from key oil fields, notably El Sharara, Libya’s largest. New startups, including the 70,000 barrel-per-day Zueitina field could be next in line, bringing exports closer to 600,000 bpd by November. Libya’s peak capacity is around 1 million bpd, and it wouldn’t be too much of a surprise to see that level by early next year.

That’s problematic for OPEC leaders determined to prevent a return to early-year crashes for the price of oil. The joint committee monitoring compliance noted recently that adherence was strong, though there’s a degree of uncertainty over what happens in January. Producers on paper could put another 2 million bpd on the market by then, but we’ve already seen some signs of cold feet. True to form, Russia is pouring cold water over the basic tenets of the collective arrangement that helped pull commodities from the ashes. Only recently did Russia say it was on board with easing back on restraint, but now the tone has changed. Russian Energy Minister Alexander Novak suggested recently the deal itself was under consideration.

“It is too early to talk about the future of the OPEC+ deal beyond December,” he said.

On Tuesday, Nigerian officials enacted a curfew in the southern state of Lagos given the uprising against alleged police brutality. Pouring fuel on the fire are claims that members of the military had fired on protestors, injuring at least one. Amnesty International said it’s been receiving disturbing claims about the violence and the nation’s president is calling for calm. With southern Nigeria home to most of the country’s oil production centers, we would expect to see a risk premium develop if the violence continues.

And we hate to say we told ya so, but we told ya so. Though, to be fair, it is 2020 so anything can happen. We’re watching the scroll on our Twitter feed of the inevitable round of hints that some sort of stimulus could emerge before Election Day in the United States, now just 12 days away. We consider it to be bad politicking for either side to move on a package this close to the election. If President Trump signs off on a deal, he can claim victory, though it would be seen as catering to pressure from the Democrats. It’s damned if you do, damned if you don’t. Sensing the stakes, and amid the prospects of something of a Blue Wave, The New York Times is reporting that Senate Majority Leader Mitch McConnell, a Kentucky Republican, is advising the White House against signing anything before the November vote.