Crude oil price viciously dipped, mainly amid deep skepticism from US House Speaker Pelosi on the possibility of any US stimulus. A reporter for Politico tweeted that Pelosi has been very pessimistic about a deal on a call with Democratic Congresspeople.
WTI light crude fell 5.5% at one point to $38/bb after subsequent comments in a Bloomberg Television interview underscored how far apart both sides remain. “This isn’t half a loaf. What they are offering is the heel of the loaf,” she said. “It’s no use going into a negotiation just saying you’ll take the path of least resistance.”
Whether posturing for a better deal or political grandstanding makes no difference to the oil markets where fundamentals are not supportive – a move higher is only possible if a fiscal agreement is reached.
Oil traders – a number of whom have given the benefit of the doubt to the Pelosi-Mnuchin brokered US fiscal deal – found themselves caught long and wrong as oil prices fell off the table on headline havoc and running against the grain. With implied demand softening and the odds of a deal skewed against a deal happening this week, it was always going to be a difficult journey. Still, it will be a considerable disappointment to the street if both parties leave the negotiating table without putting a deal to the Senate for a vote.
Oil is susceptible to any negative news, but Gold Week for Asian commodity traders is a particularly treacherous time of the year. It was both industrial metals and energies that fell under considerable pressure. As oil was getting knocked, copper is the one faring the worst. While copper stocks have increased considerably, LME inventories are now at 163k tonnes, with over 75% on warrant. After an increase of 2kt in the last three days, the moves are more extreme due to the lack of Chinese participants who had been active buyers on dips. Volumes are low, and stops are being triggered with December copper down over 5%. Recall that we had a similar move to the beginning of September when the market sold off on month-end rebalancing, and systematic selling kicked in.
My concern for the deal not getting done is that just one-third of the Senate is up for re-election in November, of which 23 seats are Republican. At this point, only four of those seats are genuinely at risk of falling into Democratic hands. That means most Republican senators have no trouble standing pat.
Still, I uniformly believe investors are very reluctant to give up their overall bullish bias, even when positive drivers such as the ultra-dovish Fed and the prospect for vaccines and new fiscal stimulus get questioned.
This makes a lot of sense to me as all three of them will likely remain critical supportive factors in the medium term, even if they temporarily disappoint in the short term. How that plays out for the oil market remains the big mystery question.
Still, the investor mindset should remain one of looking for buying opportunities for riskier assets, funded with dollar shorts and, hopefully, a pop higher on oil prices due to the currency and knock-on inflationary side effects.
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