Extending the Cuts

10/30/2020 10:00 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Oil bulls have been in a knife fight and getting cut as global Covid lockdowns expand. While demand destruction due to the lockdowns will be real, they will not be as devastating as what we saw at the beginning of the Covid crisis, says Phil Flynn of the PRICE Futures Group.

Hopes by OPEC and Russia for improvement in demand started tapering off as their production cuts have now gone up in smoke.

Despite reducing global inventories and improving demand, OPEC plus will have to stay the course as Covid makes a comeback. If the shutdowns expand, they may have to find a way to make additional cuts. Petrologistics reported that OPEC supply would decrease by close to 500 kb/d in October. There are reports that OPEC-10 compliance has averaged 80%, with a target of reaching 100% by the end of December.

Yet first things first. Extending the cuts most likely will happen. TASS, the Russian news agency reported on Friday, citing sources said that the group is already resigned because tapering cuts would cause an oil price taper tantrum. Breaking News reported that some oil cartel members would support the extension, though there were no official negotiations on this issue, the report said. Previously, Russian President Vladimir Putin refused to rule out the potential stretching of the output reduction to the next year, adding that a deepening of cuts remains on the table as well.

Yet Reuters reports that Gulf OPEC producers, the United Arab Emirates, Kuwait, and Iraq are debating whether they should roll over existing oil supply cuts into 2021 as they struggle to stick to their agreed reductions. The UAE and Kuwait have traditionally supported Riyadh’s position. Still, both nations feel the heat of tight oil policies in 2021 as they believe the size of their output cuts is too deep to sustain, the sources said. Saudi Arabia, OPEC’s de-facto leader, and non-OPEC Russia favor continuing with the current oil production cuts of around 7.7 million barrels per day into next year, rather than easing them by 2 million bpd from January as under the current pact.

The steep selloff was not just about Covid shutdowns. The return of Libyan oil to the global oil markets and Hurricane Zeta, which will again restrict supply, also caused selling. Risk-off in stocks fueled with election uncertainty cut confidence. 

Products ignored upticks in diesel and gasoline demand, only pricing more restrictions on travel to potentially come.

Natural gas prices were retreating on power outages, yet a very bullish storage report brought the market back. The Energy Information Administration (EIA) reported that working gas in storage was 3,955 Bcf as of Friday, October 23, 2020, according to EIA estimates. This represents a net increase of 29 Bcf from the previous week. Stocks were 285 Bcf higher than last year at this time and 289 Bcf above the five-year average of 3,666 Bcf. At 3,955 Bcf, the total working gas is above the five-year historical range. LNG feed gas demand is strong, and the smaller than extended injection is a warning that the gas market could prove to be much tighter than in recent years and a winter of higher prices.

Learn more about Phil Flynn by visiting Price Futures Group.

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