Margin trading products are complex instruments and come with a high risk of losing money rapidly due to leverage. 75-95% of retail investor accounts lose money when trading on margin with this provider. You should consider whether you understand how margin trading works and whether you can afford to take the high risk of losing your money.

Oil

Which way for Oil?

Nov 6, 2020
For an industry still shaken by events earlier in the year, the US election and the major risk event on the calendar has been modestly supportive for oil so far this week. But clouds are gathering over the outlook for both demand and supply amid the surge in Covid cases in Europe and the US.

Election implications

The US presidential race has been much closer than anticipated and clearly there is now no ‘blue wave’ as all the polls were signalling. Nevertheless, challenger Biden is closing in on the magic 270 marker needed to take the win. While the forecast softness in the dollar from a Democratic presidency should be supportive for the broader commodities complex, for oil the shorter-term outlook may be bearish.

This comes primarily due to the rising chances that the Democrats adopt a less hawkish approach towards Iran. This could lead to the lifting of sanctions and a return of 1.5-2 million barrels per day of Iranian supply to the market over time. But a greener Biden presidency that discourages US oil and natural gas investment in the long term may set the stage for a timing issue and supply crunch, as renewables struggle to take over market share from fossil fuels. Increased regulation and a partial ban on fracking may also tighten supply over time.

For now, it is important to remember that President Trump has guided the US toward becoming a net exporter of oil of the first time in decades. And the fact that the Republicans potentially keep control of the Senate probably has more implications for the energy sector than the oil price, as fossil fuel producers have bounced back this week in favour of their clean energy counterparts which would have been boosted by a blue wave victory.

Black April…black winter?

More importantly, spiking Covid infections and subsequent lockdowns across the northern hemispheres are expected to severely weaken oil demand, as they did in April. The International Energy Agency dubbed the month ‘black April’ and of course a shortage of storage space for oil that consumers no longer wanted created financial panic, resulting in prices briefly falling into negative territory. That collapse in prices hit the US shale sector particularly hard, which had been pushing the US to record production highs before the pandemic.

The week at the end of October saw oil prices fall 10%, when many European countries announced new restrictive measures, with the hit to consumption forecast to be significant. Before the pandemic, the region’s demand was roughly a fifth of the global total, or 20 million b/d and analysts believe that level will fall to 17-18 million b/d this month, having been as low as 14 million b/d in April. OPEC itself has already forecast that global oil demand will fall 10% this year, but that does not include the forthcoming winter blow to demand.

If stricter measures remain in place through until Spring, then more revisions will need to take place and oil prices may push further south. Rising infection cases in the US may also have a knock-on effect on demand, even if many states do not yet face tighter lockdowns. That said, restrictions are less onerous than before with for example, schools remaining open.

OPEC+ to act on abundant supply?

On the other side of the price equation, it is clear that there is ample global supply which is not helping oil bulls support or push prices higher. US stockpiles are at their highest levels since July, the Libyan ceasefire has helped put its production back on line and some OEPC members appear determined to resume production growth from January.

All these pressures set up traders for an important OPEC+ meeting at the end of this month. It seems increasingly likely that production cuts will need to rolled over into the new year. Indeed, the catalyst for a recent move higher in prices came from Russia who were said to be discussing a three-month extension until the end of the first quarter next year. This is significant as Russia has traditionally been the stumbling block in agreeing to deepening output cuts.

Much will depend on the duration of the current lockdowns during winter and if new measures further crimp demand in the US. Brent appears to be rolling over again, having been capped this week by the 50-day Moving Average at $41.59. With a bearish channel from September of modestly lower highs and lower lows, prices may drift towards first support around $39, before a potential move to this month’s lows above $36.

Ready to trade?

It's quick and easy to get started. Apply in minutes with our simple application process.

The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients. Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.