Asia Market: Script flipped on post-election reflation narrative

Market highlights 

• Intensifying pandemic flips the post-election reflation narrative
• Analysts quick to downgrade Q4 economic outlooks
• Oil remains pressured as mounting virus numbers and lockdowns threaten demand
• US fiscal stimulus package a flattering prospect for gold

Markets

This week would have been chaotic for investors at any rate, but when viewed through the lens of an intensifying pandemic raging in the West it might flip the whole picture upside down for any post-election reflation narrative.

The virus's latest evolution is complicated by a series of stricter lockdowns putting the Eurozone in the vanguard of concerns around the Q4 economic implosion and leaning against global risk sentiment after France and Germany announced tighter social-distancing measures.

Asia crude oil roundup

Despite lifting off the mat on Friday, oil prices remain pressured as mounting Covid numbers and growing lockdown measures threaten demand even though lockdowns do not seem likely to become as severe as previously.

Still, panic and fear of the virus will still likely be as problematic, so even if the overall situation this time around proves to be less dramatic, it could be quite troubling for oil prices anyway.

Traders had priced the initial downward adjustments to European road fuel demand. Still, I suspect their initial Eurozone second wave forecast was too optimistic after France intensified its lockdown measures, forcing analysts to quickly downgrade their Q4 economic outlooks which likely intensified the selling pressure. 

OPEC+ managing the supply-side to ensure a March rollover repeat in November remains unlikely. Nonetheless, traders appear to be setting up for a re-run of the associated price collapse we saw back then as uncertainly around the end of the month OPEC meeting has the oil complex hedging that it might be too premature for OPEC+ to make adjustments at this stage. Essentially, there’s no budgetary incentive for either Russia or Saudi Arabia to cut production unless the oil price reaches mid-$20s/bbl.

But as demand concerns mount, the market talk suggests Saudi Arabia is likely to cut its official selling price for Asia for December when a decision is made in the coming days. And, as recent history offers a clue, the cut could provide even further impetus to sell oil. It paints a waning global demand picture when the kingdom needs to discount prices to Asia, which is currently the market demand backbone. 

With the looming US election and weaker broader markets, oil prices are under severe pressure once again. I’m not sure anyone precisely knows how the post-election stimulus bounce vs. the ongoing Covid beatdown plays out in oil markets beyond the initial favorable bounce, but one thing that is becoming increasingly apparent is that the build-up to this holiday season could turn quietly chaotic for oil markets as folks will opt to isolate rather than celebrate, possibly sending both mobility and fuel consumption lower.

Oil trading markets

Oil followed equities lower Friday, finding some support at the $35 intraday low and ending the month down about 12%. Increased mobility restrictions have sparked concern over fuel demand and fundamentals remain negative now that all the big EU countries have significantly elevated restrictions, which pose the most significant material downside risk to the global economic outlook.

Assuming these knowns are in the price, the perceived risks into the US election this week and the OPEC+ meeting at the end of November were some of the unknown quotients holding oil prices down into the weekend, as is the fear of more stringent lockdowns. But even without government-imposed lockdowns, with the winter months still ahead it seems likely that localized outbreaks in the US will broaden and weigh on mobility.

Adding to oil market woes
 
The dollar index ended 1.38% higher on the week, Libya has ramped up production after lifting force majeure at some of its largest oil fields and ports, and OPEC+ is soon to raise output by two mn barrels per day (bpd) when its planned curbs end.

A Reuters survey sees OPEC oil output rising for a fourth month to October on a restart of more Libyan production and higher Iraqi exports that offset full adherence by other members. The survey saw total OPEC output at 24.59 mn bd on average in October, up to 210k bpd.

The Baker Hughes US oil rig count report is up by 10 to 221, for a sixth straight weekly increase. This’s consistent with companies that have the wherewithal to pump more barrels before imposing more restrictive producing activities under Biden presidency.

The Dec20/Dec21 spread has widened further to -$3.45 after touching a high of -$1.69 last week. The Arb has widened compared to yesterday's close but remains in this week's range at -$1.84, from -$1.75 yesterday. The gasoline crack has retraced to $6.90. Refining margins below $10 put pressure on refiners. Dec20 Brent expires today. Without government-imposed lockdowns and the winter months still ahead, it seems likely that the localized outbreaks in the US will broaden and weigh on mobility.

Gold's next move rests on US fiscal stimulus

Gold is down over the last two weeks, which is understandable as the Covid-19 outbreak is getting progressively worse in Europe and most of the world, leading to renewed lockdowns. It seems this is now somewhat priced into European equities, and there doesn't seem to be much more room for risk reduction ahead of the next week's US elections.

The potential unlocking of another US fiscal stimulus package would be most flattering for gold, which points to trading from the long side, provided $1,860 holds in the short term. There has been a pickup in real money buying, while fast money names have been marginally better sellers.

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