Oil Markets Outlook: Supply is acceptable. Demand is the worry.

Lifeless Crude Prices 

I’d like to briefly thank everyone who attended the Black Gold: Trading Like a Pro webinar and acknowledge that for many of us who make a living – or at least supplement our cash flow – from trading in the oil market, it’s been a tough grind of late! But, as I tried to stress in the presentation, there’s always a trade to be made at every turn if you do your homework and crunch your numbers well. 

Lifeless crude prices and frightful refining margins present a faltering demand recovery, especially with Covid-19 cases rising again. But, fortunately, OPEC's supply constraint and a further fall in US supply in 4Q and 2021 will provide the offset. 

By all appearances, after enduring six months of some form of lockdown, it looks like we’re headed for another six months of restrictive conditions. On the bright side, it will be nothing like the circuit breaker measure in March when lawmakers brought the world to a full stop. My how time flies when you’re stuck at home watching Netflix!

But even with soft or rolling lockdowns, the expectation for tighter markets in Q4 could be falling by the wayside as the demand recovery has faltered with Covid cases rising again. Still, all the signs now point to OPEC+ erring on the side of caution, given the demand uncertainty, and maintaining cuts to at least year-end. This should be enough to prevent a return to oversupply.

It’s fair to say several bearish factors have led to the crude price rally stalling in recent weeks and could overhang the market in the coming months, but demand weakness is the primary angst.

Weak end-user demand, reflected in dreadful refining margins, is a worry. Distillate stocks are still abnormally high and there are signs of the diesel demand recovery faltering. This year's Achilles heel month of September got sorely magnified through the Covid lens after traders ran headlong into the shoulder season. 

However, supply-side dynamics are incredibly supportive and should get reflected in a strong downtrend in inventories over the next few months as winter demand for heating oil picks up. 

Meanwhile, best guess case scenarios suggest no material increase in OPEC+ supply through year-end. The group is clamping down on laggards and adhering to a strong commitment to supply discipline until it sees clear signs of a decisive down-trend in global stocks and a renewed recovery in the global economy.

Supply is acceptable. Demand is the worry.