OIL : Sideways

(Fri, 9 October 2020). Crude oil prices have seen a bit more volatility in recent weeks without any significant price development. The ongoing tug-and-pull between optimism of a global recovery gaining traction amid the coronavirus pandemic and the persistent supply-demand deficit for energy has provided stability for crude oil prices. For many months now, we’ve seen crude oil prices trade between 36.00 and 45.00; there’s little reason to expect this to change.

Like at the start of Q3’20, the start of Q4’20 brings about great uncertainty for the global economy and energy markets, particularly as the seasons shift towards colder weather in the developed economic Northern hemisphere. Winter is coming, as it were, and that means that questions will linger around the demand side for energy markets. But the buoy remains: persistent efforts to curate a supply-demand deficit will likely prevent crude oil prices from falling too far.

We thus stick to our fundamental forecast of Q3’20 as we turn the page into Q4’20, having previously called for crude oil prices to stay elevated between $35 and $50 per barrel. The supply-demand shifts are a strong fundamental force that is the dominating market factor. And it still holds that, were crude oil prices to rise beyond $50 per barrel, it would be highly likely that US shale producers would come back online, bring more supply back into the mix.

Crude oil prices have a relationship with volatility like most other asset classes, especially those that have real economic uses – other energy assets, soft and hard metals, for example. Like how bonds and stocks don’t like increased volatility – signaling greater uncertainty around cash flows, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility. Heightened uncertainty in financial markets due to increasing macroeconomic tensions decreases theoretical demand for energy; signs that the global economy is recovery from the coronavirus pandemic reduces uncertainty, as does hope for a new US fiscal stimulus package.

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