Fear of lockdowns returning weighs on oil

Oil prices lost ground last week thanks to persistent fear that oil demand will fail to recover strongly as countries need to reintroduce restrictions related to Covid-19. Brent futures fell 2.8% over the week to settle at USD 41.92/b while WTI closed at USD 40.25/b, a loss of just over 2%. Confirmed virus cases are accelerating in European economies, forcing new lockdown measures as the total number of global cases has pushed above 33m. Despite the daily death rate having been relatively steady since June—even as cases have been rising—governments globally have kept markets, including commodities, on edge with the risk that new lockdowns would need to be introduced.

Saudi Arabia hosts a meeting of G20 energy ministers today with a focus on both the oil market and how to allow for a green recovery to the Covid019 pandemic. This is the second ministerial meeting of the G20 this year after a session in April when OPEC+ countries were pushing other producers—such as the US, Canada and Brazil among others—for a firm commitment to cutting output to save oil prices which were then in freefall. We don’t anticipate there will be much in the form of policy direction as a result of the meetings underway with many government outside of OPEC+ not eager to see higher oil prices at a time when most economies are either still in contraction or in extremal fragile recoveries. A strategy focusing on a green recovery may also need to wait for the outcome of the US presidential election: a Joe Biden victory would likely see stronger US commitment to international green economy objectives while a continuation of the Trump administration would mean an extension of the status quo of non-participation in COP 21 (Paris Agreement) targets.

Forward curves in both Brent and WTI remain soft with the 1-2 month spread in both contracts holding onto recent weak levels. Front of the curve spreads in WTI closed at USD 0.26/b while in Brent they are deeper at USD 0.49/b. The weaker conditions around the Brent market at the moment likely reflect uncertainty over whether Libyan production will return to markets in a significant way over the coming months. Libya’s National Oil Corp. has opened several export terminals to allow crude to flow back out to markets and said production would rise to 260k b/d from around 100k b/d at present. The Dubai swaps curve remains in contango although it has been oscillating closer to the neutral level: 1-3 month spreads in Dubai swaps closed at USD 0.34/b in contango at the end of last week.

Investors added net length in crude futures and options last week for the first time since mid August. Both contracts are on track for a monthly closer lower so there may be an element of investors buying in anticipation of at least a modest recovery back to the mid USD 40/b range. However, speculative net long positions as a share of open interest don’t show much conviction in an upside for oil: net length holds 3.3% of total open interest in the Brent market, around half its level from July, while WTI speculators are holding almost 13% of total open interest, roughly flat on where it has been in the last few months.