HedgeTalk: "Outlook Appears Fragile” International Energy Agency

By: Johan Rosenberg, Chairman


Trading volume for all futures contracts of RBOB (reformulated blendstock for oxygenate blending) and ULSD (ultra-low sulfur diesel) hit more-than-five-year lows late this past summer.

* Source: Sept. Energy Information Administration

The reduction in trading volume reflects the overall decline in physical petroleum product market activity, including lower refinery production and less end-user hedging. For example, Airlines, who often use the futures contract for hedging, continue to face significant declines in flight activity and are contributing to a reduction in futures market volume.

Be cautioned! Unsubstantiated “hope” for strong economic recovery and increasing demand for oil may not be supported by broader trends including:

1) the total obliteration of demand in the aviation industry in the wake of the COVID-19 pandemic,

2) the 200-day moving average of crude oil is declining,

3) BP Plc revealed its plan to turn itself into a clean-energy giant,

4) and the International Energy Agency’s announcement on Tuesday to cut its forecast for 2020 oil demand growth.

All of this combines to give no confidence of oil hitting $60/barrel anytime soon. This all trends to the downside until at least next Spring.

In the short run however, the warnings of trends undercutting oil prices appear to go unheeded, with WTI stuck near $40/barrel. This could partially be due to Hurricane season disruption causing supply outages. Also, notably RBOB and ULSD futures settled higher last week, Sept 25, as demand outlooks improved over the hope for more US Stimulus. However, crude prices were kept in check by resurgent Coronavirus cases in Europe.

Three notable quotes from the International Energy Agency:

“We expect the recovery in oil demand to decelerate markedly in the second half of 2020, with most of the easy gains already achieved."

“The economic slowdown will take months to reverse completely, while certain sectors such as aviation are unlikely to return to their pre-pandemic levels of consumption even next year.”

“With the on-coming northern hemisphere winter, we will enter uncharted territory regarding the virulence of COVID-19. In last month’s Report, we said that the market was in a state of “delicate re-balancing”. One month later, the outlook appears even more fragile.”

The downside of the short hedge is that the crude oil buyer would have been better off without the hedge if the price of oil continues to go down. On the other hand, the election outcome, a reversal in the Dollar slump, and an effective COVID-19 vaccine could introduce euphoria and extreme volatility. How will your budget fare if always buying in the spot market?


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