The GERM Report

-The quarantine economy is a mismatched one.

-US shale showing its resiliency.

Remember Monday? Ahh, the good ol’ day. We started the week with crude oil prices rallying in stellar fashion on hopes of a vaccine for COVID-19. Since then, we’ve seen an exponential rise in new infections, particularly in the United States where partisan differences make control methods difficult at best. The out-of-control pandemic is having real impacts on demand, and those impacts seem to be getting worse. On the other side of the equation, the steady rise in Libyan production and US rig counts is adding insult to injury.

The price for Brent crude oil was down 1.68% as of 2:30 p.m. ET to trade at $42.80. US crude tested August highs of around $43 per barrel, but was retracing sharply by Friday afternoon. On the week, however, Brent was on pace to finish about 7.5% higher.

Brent finished trading Monday up some 7.5% after Pfizer and German biotechnology company BioNTech announced their vaccine for COVID-19 was 90% effective in clinical trials.

“As the week wore on, the continued surge in coronavirus cases in Europe and not least the US reduced the excitement somewhat,” Ole Hanson, the head of commodity strategy at Danish firm Saxo Bank wrote Friday. “This in the realization that the economic pain will likely increase further in the short term before eventually improving as scientists deliver a number of vaccines that will support a move towards normality during the second half of 2021.”

Fast-track approval from US regulators could come before the month is out, though the drug would unlikely be widely available until sometime in first quarter 2021 at the earliest.

That, along with the unlikely prospect that US lawmakers will agree on another round of stimulus before the year is out, means the economic situation is likely to deteriorate before the year is out. And we’ve already seen the warning signs. Consumer confidence in the United States came in lower than expected. And the US Federal Highway Administration on Friday reported that, after seeing modest uptick in August, road travel fell by 23.4 billion vehicle miles in September, well before the latest surge in COVID-19. If this were a normal year, we’d expect road travel to diminish but reverse course during the busy holiday-travel season. But with authorities questioning the wisdom of big holiday gatherings, we’d expect road travel – as well as gasoline consumption – to decrease. There could be a silver lining, however, if distillates, including diesel, see higher demand given the switch to online life and package deliveries.

The price point for oil, however, does not seem to deter drillers. Oilfield services company reported US drillers added 12 rigs during the week ending Nov. 13, but activity is still about 60% lower than it was this time last year. Or, you could look at it as the United States saw rig counts jump some 115% over the last seven months, a sign of shale’s continued resiliency. When those rigs translate to production, and if drillers continued to dust off DUCs from their inventory, US output is on pace to increase, albeit at slower levels than during the shale boom. Libya too – and we’d expect Iran and Venezuela to join the crowd in January – is putting more barrels on the water, showing just how mismatched the quarantine economy is becoming.