The GERM Report

-EIA sees Brent at $47 per barrel. It started the year closer to $70.

-We may be headed back into the tunnel.

Crude oil prices remained in rally mode on Tuesday, though it may be a carry-over from the optimism the fueled the major rally in the previous session. Support came elsewhere from a report that found U.S. crude oil production may be slowing, despite recent gains in rig activity in the shale patch. But even as oil claws its way out of the mid-$30 range, it may be too little too late for the downstream sector. And with all the focus on the still-messy U.S. election, Russia looks again to insert itself on the geopolitical chessboard.

After coming in just shy of a double-digit gain in the previous session, the price for Brent crude oil was up 2.5% as of 2:10 p.m. ET to hit $43.47 per barrel. US crude oil was following a similar trend, though if it fails to break out, we could see WTI stuck in the $38-41 per barrel range that kept many of us yawning from September to October.

Crude oil prices, along with equities, soared in the previous session on hopes for a vaccine to treat COVID-19. The global pandemic has left much of the energy sector in ruins, forcing some companies into bankruptcy and leading to mergers that would inevitably create redundancies in some services. With a vaccine, social restrictions would inevitably end, air and road travel would accelerate and we’d all drive to restaurants and take our kids to a brick-and-mortar school again. That’s supportive for commodities, just not right now.

“… any vaccination programme will not have a major effect until the second half of 2021, and in the meantime oil consumption is set to remain depressed, leaving OPEC and its partners with more to do to rebalance the market,” Reuters oil columnist John Kemp wrote Tuesday.

We’ve noted before that the architects of the OPEC-led effort to balance the market through coordinated restraint have two problems; one is supply and the other demand. Libya is fast approaching, if not at already, the 1 million barrel per day mark in output, causing concern for OPEC planners wondering if they need to roll restraint levels over in the New Year. Accelerations in global infections of COVID-19 – because remember, we’re still in a pandemic – will only dampen demand further. That would be a concern at this point of year in any event because of seasonal factors, pandemic or not. In its short-term market report for October, the Energy Information Administration estimates global oil consumption for 2020 will be 8.6 million barrels per day less than it was last year and increase by only 5.6 million in 2021. While we should all know better than to look too far ahead, the EIA said it expects Brent will average $47 per barrel next year. It started 2020 at $66.25, suggesting many of us have forgotten what pre-pandemic even means.

Offsetting some of the supply-side pressures are lower expectations for US crude oil production. But will that matter if demand destruction continues into next year? Hammered by the lack of demand for petroleum products, Shell and Marathon are mulling whether to close some of its US refineries for good. And the downstream sector in Australia and New Zealand reads like a who’s who on closures, with everyone from BP and Exxon mulling what to do next.

And while we were all glued to the television and our Twitter feeds to monitor the U.S. political circus, Russia has been steady-eddy with its nibbling around the fringes of the former Ottoman Empire. Russia, which sides with Armenia, is sending “peacekeepers” into the disputed territory of Nagarno-Karabakh. Going on for more than 20 years, the overlapping alliances in the region are troubling, and the neighborhood is no less volatile. The borders themselves in the area are a recipe for disaster, and neighbors Iran and Iraq make the scene tense by nature. A shaky truce is holding, though we wonder about which victor will take what spoil in the area. Western allies hold the majority stake in much of the oil and gas assets in the Caspian region, though with Russia’s long-held ambitions to extend its influence beyond the Black Sea, we’re curious to see if peacekeeping and expansion go hand-in-hand.