The GERM Report

-The market, we’ve heard, may know something.

-Believe it or not, Brent is closing in on $50 per barrel.

Crude oil prices continued to test the $50 mark in trading Friday, even with lackluster employment levels in the United States and the prospect of more barrels on the market from OPEC+. Volatility, however, cooled off this week so perhaps the market is looking for a new band to live in for a while after it’s done testing new highs. Elsewhere, we’re concerned about geopolitical risk after the Trump administration blacklisted China’s state oil company CNOOC.

U.S. crude, which we’re shocked to hear could be rolled in to the Brent basket, looks like it has some room to go on the upside. Brent is poised to brush up with the $50 psychological threshold, but was short of the level as of 3:30 p.m. ET, trading up 0.6% to $49.01 per barrel. On the week, Brent looks in range with our Orange alert issued Monday, which forecast movement of about +/- 3%.

We’ve been somewhat puzzled for much of the week by the excited chatter of an OPEC+ divorce running up to the virtual meeting on Thursday. Barring the price war between Russia and Saudi Arabia early this year, the group has held together reasonably well considering all the players in the mix. We’re equally puzzled by the market response to the latest agreement, noting Thursday that should Libya, rather than the collective OPEC+ group, announce another 500,000 barrels per day in output in January, the market would almost certainly turn south. But we also recognize this new normal may require a new way of thinking.

We see two competing narratives at play;

Phil Flynn, an analyst at the Price Futures Group in Chicago, told MarketWatch on Friday the 500,000 bpd allotment and the prospect of cheaters making up for lost ground means the new deal is just going to “move barrels around from one producer to another.”

“Surely, the market would have preferred extension of the cuts,” Manish Raj, the chief financial officer at Valandera Energy, a U.S. producer, said in the same report. “But a modest production increase is still a win.”

The latter seems to be supportive of the rally. A research note we saw this morning suggested that, with prospects of COVID-19 vaccines – plural – coming soon and US lawmakers at least agreeing on a starting point for stimulus negotiations, the market “knows something” about pending demand.

But how can it? We recognize our position tends to be somewhat bearish, though if this year has taught us anything, it’s to expect the unexpected. That’s what makes this market a gamble. Vaccines for COVID-19 rely on messenger RNA, a novel method in immunology. What’s the long-term impact? Will we see the same opposition to a vaccine that we do now with social restrictions or a face mask? The market is betting, rightfully, on better times, though it seems premature from our perspective to be $50-per-barrel excited. We would certainly expect a Santa Claus rally, though consumer demand on products is an easy case-in-point drag on all of the other wonderful news. Even if things are better now, they’re far far worse than they were at this time of year. Our notion of “good” has been profoundly changed by the pandemic.

We saw a note from Citi today (yeah, we know they’re bearish) that said inventories are indeed drawing down, but putting another 500,000 bpd on the market will inevitably clog the drain. The situation is almost certain to be better in the first quarter than it is now, but remember we still have a US president in office who thinks he won the election and a big economic mess to clean up. Companies hired in November, though the US government said the pace of hiring was slowing.

Elsewhere, the Trump administration continues to take aggressive action against the Chinese government, with the director of national intelligence arguing in The Wall Street Journal that China was the gravest threat to freedom since World War II. China is not Nazi Germany. Nevertheless, the administration later blacklisted China’s state-owned CNOOC for alleged ties to the military. That could in theory limit cargoes of US-produced commodities such as liquefied natural gas. Grace Lee at Platts explained the blacklisting only limits US persons from dealing with CNOOC, so the consequences could be limited. On optics, however, it could have an impact on equities and commodities, particularly if it diminishes China’s capacity to access finances with U.S. companies.