Don’t Forget About Supply
By all means and measures, last week’s government inventories report was bullish, but that didn’t drive prices higher for the week. This is further evidence that demand is the major concern.
U.S. crude, gasoline and distillate inventories all fell the week-ending September 18, EIA data showed. Crude inventories fell by 1.6 million barrels, less than forecast; gasoline stocks dropped more than expected, sliding by 4 million barrels; while distillate stockpiles posted a surprise drawdown of 3.4 million barrels.
Although OPEC+ is doing its best to curtail global supply with its massive production cuts, and could do more if called upon, there could be a problem if Libya brings more oil to the market.
In Libya, an oil tanker was loading cargo on Thursday from one of three Libyan terminals that were reopened in recent days and more cargoes are expected to be lifted in the coming days. It may look bearish on the surface, but analysts are questioning how quickly the country could ramp up supply.
There are additional reports that Iranian oil exports have risen sharply in September in defiance of U.S. sanctions, three assessments based on tanker tracking showed, throwing a lifeline to the Islamic Republic and its collapsing economy.
We’re expecting a sideways-to-lower trade over the near-term as long as the number of COVID-19 cases continue to rise worldwide. On the downside, the biggest concern will be renewed restrictions in the U.S., Europe and Asia.
Other factors that could weigh on prices is a stronger U.S. Dollar that tends to reduce foreign demand for dollar-denominated crude oil. This goes hand in hand with the strength of the U.S. economy. Increased supply from Libya and Iran could also become bearish factors.
The drop in distillates is encouraging because it could be an early indication of renewed demand. However, if the airlines don’t get stimulus money then distillate prices could plunge again.
The wild cards are the coronavirus vaccine and the OPEC+ production cuts. A vaccine will reduce the number of cases and ease restrictions. OPEC+’s output cuts are helping to underpin prices, but they may need to do more. Over a week ago, prices rose sharply when they said they were cracking down on over producers. Another steep decline could lead them to tighten the screws even further.
For a look at all of today’s economic events, check out our economic calendar.