It was a bumpy 24 hour session as markets were toing and froing as concerns about demand resurfaced in the face of rolling lockdowns globally. But prices eventually started to sail on the favorable side of the wind, jumping to a five-month high tracking broader risk sentiment.
As crude oil price volatility reverts to pre-March levels, prices continue to melt upwards following the US equity markets packing in more optimism about the economic recovery stateside where the general feeling is that the economy is recovering quicker than anyone had imagined. This confidence is playing out favorably for the oil market as traders are taking prices higher, speculating on more robust crude demand in the not too distant future.
Also, global risk sentiment was bolstered by liquidity injections from the PBoC, which is attempting to strengthen a sleepy retail sector. Investors speculated, most favorably for oil markets, that going forward it could mean a supportive monetary policy from the PBoC.
It was a robust way to start the week after progress on oil's demand recovery was aggregate positive last week with across the board falls in the US inventory reports.
On the supply side, the OPEC+ JMMC meets and metrics around compliance will unquestionably be the topic of the day after quotas were eased at the start of the month.
And lower Baker Hughes rig count on Friday indicated there’s no visible pick-up in activity in US shale, even as previously shut-in production is being brought back online, which is also favorable for oil prices. This suggests CAPEX issues will be the challenge for shale oil's Phoenix to rise again.
Still, oil's rally could remain capped by recent surges in coronavirus cases around the world, which never stray far from the primary demand narrative.
This week's JMMC could prove to be a catalyst as the meeting may address continued failure to comply with past quotas by Nigeria, Iraq and others. Still, the incentive will be to emphasize proper overall compliance (around ~95%) and possibly to provide more detail on the framework for the principle of compensation over the next few months by OPEC+ members who have lagged so far. With that said, Iraq has made its most substantial pledge to administer deeper cuts in the coming month to compensate for laggard months. If there’s a similar sturdy commitment from other laggards, the meeting will likely be viewed as a success by the market.
Saudi Arabia reportedly added more than 900kb/d of production in July but remained below its agreed OPEC+ quota. However, the roll-back of Saudi over-compliance signals that it’s less willing to carry the load. And while the risk of another price war is low, it remains critical to see evidence of OPEC+ participants teaming together in what remains a delicate period for oil.
OPEC+ continuing to present a unified front would be the most favorable outcome from the meeting as, most likely behind closed doors, Saudi Arabia will be putting the screws to the non-compliant members to compensate.
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