Asia Oil: It Is Ugly, But It Is Not All Doom And Gloom

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Oil is in track for the ugliest and biggest two-week drop since April as US inventories rise bearish to consensus at this horrible time as mid- September heralds the end of the US peak driving season. All the while, refinery runs are hampered by weak margins and lingering hurricane impacts. 

Still, positive for the view is gasoline warehouses are getting taken down, but this doesn’t lessen the forward-looking concerns that demand could deteriorate into the slower driving winter month, which this year is getting compounded by virus fears as the northern hemisphere moves indoors where the virus could spread quickly.

Still, with oil markets getting held hostage to broader market risk, oil bulls desperately need that US CARES stimulus lifeline. But even on that front, perhaps the cruelest reality check of them all this week is getting viewed through the lens of the fiscal impasse. Congress’ dithering leaves 28 million Americans without the ability to put gasoline in their car. That will most certainly show up in demand as time goes on.

And bearish price action on the broader market was also a factor suggesting it is not only the September seasonality effect that was hurting oil. It was a double-barrel effect as the combination of seasonality and general dreary market sentiment contributed to the precipitous price fall this week.

Indeed, the contango remains solid with the WTI Dec20/Dec21-3.96 and provides the poorest forward-looking optics of them all. 

But at these levels, trading houses might begin to think about buying for future delivery and could start bidding for offshore storage, which is typically the case when tanker rates are as depressed as they are right now.

The slope and curve economics are not quite there at the moment but getting close. So, in the absence of further OPEC interventions, should the curve steepen more, and tanker rates remain favorable, trading house demand could provide a keen level of support. 

China’s top leadership will layout its 2021-2025 strategy, including increasing its state reserves of crude, which should be favorable for the longer-term view.

I struggle to see how this will not be good for the reflation trade, so I suspect longer-term players will be looking to sell USD and strap on some commodity risk, especially oil, which is currently trading at a four-month low.

The correction in oil was overdue, in my view, given a slowing demand recovery and rising supply in the near-term. Still, medium and longer-term fundamentals suggest limited downside for oil from here. Any dips will likely be sentiment-linked and short-lived, with a tightening market driving a gradual recovery through the $45/b into year-end. But its Friday, so have a good weekend as these levels will likely be had on Monday. 

But it is not all doom and gloom. 

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