Brexit Negotiation Optimism Has Been Replaced With a Stalemate

12/08/2020 10:00 am EST

Focus: GLOBAL

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Still Brexit, after all these years. One might think that after three years of Brexit negotiations, it would fail to move markets, but it still does, says Phil Flynn of the PRICE Futures Group.

Last week's Brexit negotiation optimism has been replaced with a stalemate over fishing rights, rules surrounding competition, and who is going to govern the agreement. The rift caused the British pound sterling to tank and has global markets flip into a risk-off mode. The drama has weighed on oil at the start of the day even as there is more evidence that the global oil market is tightening.

Javier Blas pointed out that if you look at global crude oil floating inventories last week, it has dropped below the 100 million barrels for the first time since mid-April, according to Vortexa. Floating oil had risen to 150 million from April to June and since then it has dropped 110 million barrels. The combination of good OPEC+ compliance, as well as a big drop in US output, has helped. Demand in China and the possibility of vaccines should send global oil supply below average next year.

This trend is a slap in the face to the predictions of oil prices staying low due to the Covid-19 pandemic forever. The prediction that OPEC+ cuts would have no impact on supply was wrong. The prediction that low prices would not spur demand was wrong. I am sure we will be hearing from those who got it wrong saying that Wall Street and speculators are to blame. The reality is that this is another case of low prices curing low prices as production cutbacks and demand is on an upward curve. With a vaccine on the way, the potential for a significant oil price spike next year is rising. The markets work and eventually find a way to work, and speculators play a significant and positive role in global oil price discovery that helps both users and consumers.

The increase in oil prices is starting to put a little life back into the US oil producers. According to Baker Hughes, the oil rig count increased by five rigs last week. That is ten weeks out of 11 the rig count has risen, and while the US oil producer has a long way to go to recover, there are some signs of life. Maybe that is why OPEC+ had such a hard time extending production cuts.

Natural gas has been taking a hit on above-normal temperatures across the Midwest. Bret Walts of Bamwx.com reports that the cooler start to the month in the East has panned out nicely so far, with even a decent snowstorm in the NE this past weekend. We'll have a few more days of cooler air out there to start the week, but the gentle Pacific jet stream will become the dominant driver of the pattern into mid-late December.

There could be a cold front in the East mid-month, but the Pacific's mild air looks to win out into the latter part of the month with widespread warmth for the CONUS. Overall, all top drivers are indicative of warmer risks and lower demand, though some volatility in the polar vortex needs to, at the very least, be watched into the new year. To get sustained cold into next year, we'll really need a disruption of the polar vortex to overpower the strong La Niña force, which tends to bring mild air from the Pacific.

Learn more about Phil Flynn by visiting Price Futures Group.

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