Market Outlook: Oil - Signs suggest a positive week for oil prices ahead

Crude markets are trading in a tight range around the Brent $45 mark with little progressive news flow on the macro front. 

This week's inventory data was supportive, but the next significant catalyst that the market is focused on could be the US coronavirus stimulus package, which should positively impact the broader economic recovery and, by extension, energy demand.

Clouding the near term view, the International Energy Agency market outlook sounded a cautionary note around jet fuel demand while revising their overall demand outlook down and supply revised up. 

The staggering and rapid rise in global Covid-19 case counts around the world – the totals have breached the 20 million – has traders looking over their shoulder to where new lockdowns might be necessary for the wake of coronavirus curb measures getting reintroduced in hot spots around the globe. And, like traders, this hasn’t gone unnoticed by critical forecasting agencies. It's worth highlighting that it took six months for cases to reach 10 million after the first infection surfaced in China, while the second 10 million took only six weeks.

Despite the worst-case scenarios from 2Q having been ruled out, still, the skies are not entirely blue. The lack of contrails reminds us that a significant product demand is absent as airline fleets around the world remain grounded as jet fuel demand remains exceptionally depressed. 

The IEA is reducing demand estimates for 2020 and 2021 and increased forecasts for non-OPEC supply in 2H20 to account for the return of shut-in production from the US and Canada, with OPEC applying similar logic. 

The IEA points out that demand has been running ahead of supply since June this year, thanks in part to OPEC+ cuts and curtailments from non-OPEC producers, and though markets will remain tight in 2H, they will be less tight than initially expected.

No surprises from OPEC as Reuters reported the Russia Oil Minister sees no hasty OPEC+ decision this month. Consistent with the market's view, the JMMC will only add more barrels when prices remain stable nearer to the midpoint of their $45-50 near-term targets, and the curve moves in more ordinary and consistent backwardation. But Novak's comments suggest a couple more dollars can be squeezed to the upside before OPEC+ turns on the taps. Meanwhile, the improving vaccine outlook is helping the overall view. 

Oil remains buoyed by optimism that a sustained recovery in energy demand is underway. However, this is despite a more downbeat IEA demand report.

But longer-term traders are covering the dips on expectations that the US coronavirus stimulus package will eventually be agreed, which should, as mentioned above, positively impact the broader economic recovery and, by extension, energy demand. 

Overall, I expect another positive week for oil prices more broadly as investors draw support from what’s expected to be another inventory draw despite the stimulus jostling. At the same time, economic data should continue to support the mildly improving reopening view.