The GERM Report

-We clearly have a demand problem going forward.

-Market shrugs off landfall of Hurricane Zeta.

It was a bloodbath for crude that not even missile threats for Saudi Arabia could upend. And traders all-but ignored landfall from Hurricane Zeta. Instead, it was a build on commercial crude oil inventories in the United States and tightened restrictions during the pandemic that spooked the market Wednesday. Adding insult to injury were comments from Saudi Aramco’s trading arm that OPEC had a real demand problem facing it come January. The word of the day was contagion.

Brent crude oil prices started on the back foot early in the trading session and essentially fell down from then on out. Even though we continue to believe US inventory data are skewed by the busy hurricane season, oil prices collapsed in Wednesday trading. As of 3 p.m. ET, the global benchmark for the price of oil lost its grip on $40 per barrel, falling 4.4% to trade at $39.79 per barrel.

The eye of Hurricane Zeta is expected to hit the US Gulf Coast by around 4 p.m. local time, 5 p.m. on the east coast, as a Category 1 storm. It would be the next in a steady stream of storms to hit Louisiana in what’s been arguably one of the busiest Atlantic hurricane seasons on record. The latest estimate from US federal officials found about 67% of total US oil production in the Gulf and 45% of total gas production was sidelined by the storm.

“Year-to-date, the 2020 season has curtailed a little over 110,000 barrels per day, which is still half of the disruptions brought on by the 2005 Atlantic hurricane season that shut in a little over 220,000 bpd of crude on annual basis,” Sami Yahya, a senior oil supply and production analyst at S&P Global Platts, said in an statement emailed to The GERM Report. “By comparison, between 2009 and 2019, the annual average disruptions from the Atlantic hurricane season averaged a little under 20,000 bpd.”

But the market didn’t care. Instead, it was a report from the US Energy Information Administration on oil and product inventories that hobbled the market. Commercial crude oil inventories are still 10% higher than the five-year average for this time of year, and the weekly storage level swelled by a staggering 4.3 million barrels for the period ending Oct. 23. Total products supplied, a proxy for demand, were 12.9% lower than this time last year.

Demand will only get worse from here, it seems. In Illinois, state leaders are reimposing lockdowns for some counties starting during the weekend as new cases of COVID-19 surge. The rolling seven-day average for new infections was 6.7% as of Tuesday, up from 3.4% at the beginning of the month. Seeing its own increase in new cases, Michigan Gov. Gretchen Whitmer said Wednesday she had concerns about the days leading up to Election Day.

“I have a lot of concerns going into this election, not necessarily about the election itself, but all of the activities that are going to happen between now and the election,” she said.

A state holiday of sorts, the collegiate American football match between the University of Michigan and Michigan State University is this weekend.

On the other side of the Atlantic, new COVID-19 infections are almost as high as they were at the beginning of the pandemic, and more testing makes the numbers look staggering. As part of a “save Christmas” initiative, Italy closed segments of the economy down and Ireland enacted new restrictions last week. French authorities, meanwhile, were reviewing the details of a four-week shutdown, while German Chancellor Angela Merkel is considering what to shut down and when.

All that adds up to lackluster demand ahead of what’s usually the biggest holiday travel season of the year. Ignoring expectations that Libya will hit the 1 million bpd mark in the coming weeks, OPEC most certainly is looking hard at the pandemic. Parties to the collective agreement to balance the market through voluntary production cuts will review their position in January. Chinese demand is showing strength, but it’s the only game in town. Sensing the dilemma, Ibrahim al-Buainain said in a Wednesday interview with Gulf Intelligence that OPEC has a “lot of demand issues” to consider until then.

And in a reflection on these oh-so-strange times, we should comment on what didn’t factor in today. The US Embassy in Saudi Arabia issued a warning early-Wednesday of incoming fire.

“The embassy is tracking reports of possible missiles or drones that may be headed toward Riyadh today, October 28,” its advisory read.