Oil prices recovered into the weekend, and if there was a glimmer of optimism for oil and the virus on Friday, it was the remdesivir news. However, despite the good news, it remains incredibly torturous digging out from under those US virus case counts that are rising by the day.
Oil prices slipped lower in early Asia as traders turned their focus to the OPEC meeting of top producer this week, The meeting could put in motion the current agreement plans to begin scaling back the massive output cuts that have effectively stabilized markets. However, the challenge remains doing so without causing a "taper tantrum."
Due to the uptick in virus cases globally, which suggests oil markets remain a sick patient, will OPEC+ deliver just what the doctor ordered and provide one more month of wiggle room by extending the historical output cut? Or will we see the introduction of a backwardation target? Either of which could be interpreted quite favorable for oil prices. The latter option would allow OPEC to scale in production gradually on a more quantified real-time measure rather than relying on rolling backdated metrics
July could be a shaky month for oil. The recent surge in coronavirus infection numbers in the US and elsewhere have brought demand risk back into focus. The planned easing of OPEC+ production cuts next month after a one-month extension of the initial phase of the production cut plan and a potential rebound in US production could add pressure on the supply side of the equation. And factor in Libya lifting the force majeure, it adds another unwanted level of supply-side uncertainty at an extremely critical point in the oil price recovery phase.
Even medium-term oil bull zealots must give way to the markets short term trading sensibilities and proclivities. Trading ranges continue to narrow as exchange volumes dwindle. Summer markets yes but also reflect that no one has seemed to have much conviction on anything right now - the perfect definition of a vicious circle. The more uncertainty grows, the less activity picks up as we remain stuck in the only trade if you have to the environment. Moves that do occur tend to get magnified or blown out of proportion. The perfect example was the significant move down on Friday despite the fact there had been something of a de-coupling of the market and pandemic effects of late. It does not take much for the snowball effect to start in motion in thinly traded markets.
While the evidence suggests we are past the trough for oil and that supply and demand are rebalancing, near-term headwinds remain as the short-term fundamentals are about as muddy as possible.