The GERM Report

-Seasonal factors are heightened by the pandemic.

-Some OPEC producers are getting impatient.

It was another bruising day for crude oil prices, though major indices had recovered somewhat from the early-morning sell off. We’ve said it before and we’ll say it again, demand is a clear issue as the pandemic holds no quarter. Apart from lockdowns in parts of Europe and some U.S. states, the seasonal factors that would make this part of the year a relatively slow one are becoming more pronounced. The market largely shrugged off Shell’s latest effort at BP-ing the market with the “p” word, instead following equities in a run toward the bottom. Adding to the Libyan issue, meanwhile, it looks like Iraq and other Arab states want their market share back, casting doubts over the OPEC-led effort to balance the market.

The price for Brent crude oil was down by close to 6% earlier in the trading day, though was able to gain some ground back by mid-day in a sign of dip-buying. A huge gain in US GDP for the third quarter was written off as yesterday’s news, leaving Brent to trade down about 3.3% as of 2:30 p.m. ET to trade at $38.30 per barrel.

If this were a normal year, we’d be looking at dwindling demand now that the summer holiday season is over in the Northern Hemisphere. But this isn’t a normal year. On Wednesday, we noted that the Energy Information Administration in the United States reported total products supplied, a proxy for demand, were 12.9% lower than this time last year. Patrick DeHaan at Gasbuddy said that, according to drivers who use its proprietary pay program, gasoline demand on Wednesday was 8.1% lower than last week.

“For the first four days of the week, we’re down 3.45% from the same period last week,” he said. “Notable decline in demand.”

We were talking with Paul Hickin, an associate editorial director with Platts in London, about the massive selloff this morning. When asked if the big dip was all about the lockdowns, he said he thought that may be the case.

“Fear is setting in that the second wave could actually be as big as the first wave perhaps,” he said.

It wasn’t all bad news though. Royal Dutch Shell offered a bit of a surprise. Kind of. The company reported third quarter earnings cratered some 80% to $955 million, but that was far better than the $146 million profit expected by most analysts. Even still, the company said a negative impact on demand was expected because of the COVID-19 pandemic. Following its industry peers, Shell said oil production last year was likely its peak because it was moving more capital into renewable energy and its power business. Like BP earlier this year, Shell said it was preparing for a “complete overhaul” of its business as it seeks net-zero emissions by 2050. That means some 9,000 redundancies, or about 10% of its workforce. Exxon Mobil decided to get in the game too, announcing it would cut some 1,900 from its payroll, with most of those job cuts coming from the United States.

But oil is still oil and it’s still a relatively profitable game. Middle East producers depend on oil sales for a lot, and in many cases nearly all, of its government revenue. Many of these same countries are war-torn, meaning their options are exceptionally limited. OPEC and industry sources told the Reuters news service that Iraq, Kuwait and the United Arab Emirates are losing patience with voluntary restraints. OPEC leaders in January will decide whether to put more barrels on the market, but frustration is growing over the two-month waiting game. Iraq is known to cheat anyway, but considering Kuwait and the UAE usually side with OPEC’s de facto leader Saudi Arabia, the chorus of voices wondering about what’s next may be getting a bit too loud.

“The countries are being suffocated with those cuts, it is very tough to continue with them next year too,” one of the sources said.