Asia Oil: Traders get served up another dish of angst

Oil prices bounced off overnight lows, finding some support from broader markets and appearing to be in some semblance of consolidation mode after traders were served up another dish of angst when OPEC+ revised their demand outlook downwards.

But the storyline very much remains the same as traders stay bullish longer-term around the prospects of a vaccine. In contrast, over the short term, they remain deeply troubled by a heavy topside to supply scenario through year-end versus second wave Covid-19 demand concerns. 

There’s a palatable level of uncertainly that continues to play out in price action. Sentiment has turned very bearish as we move into the shoulder season post US Labor Day. Indeed, the market appears concerned about the draw in inventories slowing as bullish bets peter out, with traders equally worried about just how precipitous the oil price decline could be during the second wave of the pandemic.

Relatively little has been noted in the press about the OPEC+ deal ahead of the meeting this Thursday of OPEC's Joint Ministerial Monitoring Committee (JMMC). Still, there have been signs of strain since the last JMMC with Iraq and Nigeria struggling from the outset to comply with their quotas under the OPEC+ agreement. While they have agreed to over-compensate as other producers ease cuts in line with the assumed arrangement, time will tell whether this happens or not. But a new problem producer has emerged within OPEC, with the IEA and Petro Logistics reporting that the UAE produced ~3mb/d in July – and even more in August – against an OPEC+ target of 2.6mb/d. This is concerning for the group's overall commitment to compliance.

But looking at where price action for both grades is anchoring, and as Brent loses the psychological 40-dollar mark, there’s a powerful incentive for OPEC+ to present a unified front to avoid any hit to compliance sentiment. Indeed, the group cannot afford open signs of discord or to allow compliance to weaken, particularly at a point when there are also indications of softness in global demand.

OPEC has also downgraded its outlook for global demand, which raises the obvious question of why they prematurely eased production cuts last month. But will OPEC blink on Thursday and fend off the oil glut with the resurgence of coronavirus still weighing on the demand outlook? Price action so far says the market doesn’t think so. 

To a degree, some of this angst was expected after the initial demand rebound and easing of emergency OPEC+ production cuts. Still, it will likely take 18 months or more to repair the damage done in 1H20. Hence, we should expect prices to recover only slowly once reopening starts to pick up again.