Dear Prudence: Trading Floors Will Be A Major Challenge for Oil Markets

This edition provides more insight into the detailed analysis from our Short-Term Outlook service, which covers a period of eight quarters and provides monthly forecasts for crude oil, natural gas, NGL, refined products, base petrochemicals and biofuels. Contact us for details.

The world has never been better prepared to face the COVID pandemic than today: widespread practices including the use of mouth coverings and social distancing have been implemented globally, along with other mitigating efforts, such as certain businesses (i.e. supermarkets and stores) installing acrylic walls at points of sale and other precautions. Yes, infections are increasing in certain areas, but for the most part, local level responses are quicker and more effective since the learning curve has been covered. This in theory should make the winter season in the northern hemisphere manageable, or at least not as hectic as it was in March-April when the global reaction to the pandemic was heterogeneous and uncoordinated.

One of the biggest concerns for crude prices between now and March 2021 would be an overwhelming number of people feeling symptoms that are reminiscent of COVID but will be related to seasonal cold and flu. Information from health and government entities will be paramount to minimize hospitals flooded with people that check in without actually being infected.

In this scenario, crude prices will be more sensitive to market perceptions and to the way trading floors react to news, either on infections on the general public or on key political figures, like it is the case of President Trump’s recent positive test. This news in itself does not impact oil market fundamentals, but spawned financial anxiety and uncertainty, which reverberates on futures markets for crude and refined products. The balance between prudence and anxiety in trading rooms might become more important than ever in the run up to the US presidential election.

If the demand side looks challenging, crude prices do not have other support than supply-related news, and the market perceptions at major trading floors of supply/demand dynamics.  

  • With respect to the supply side, it will be important for OPEC+ to provide a statement that demonstrates cohesion, and clearly indicates that the extended cartel will be ready to push back on the current production levels for two or three months, in order to provide bullish news to a market. Even if the cuts are ultimately not needed, the message will provide support for crude prices.
  • With respect to the market perceptions, some of the most relevant news is coming from major oil companies, which have recently been related to achieving their net-zero targets by 2050. While concerns pertaining to global warming are relevant, sending the message that oil markets will not be a long-term priority has an immediate effect on futures contracts and could create a permanent backwardation structure, where project financing and stock building will be harder to achieve.
  • Trading floors are currently receiving negative signals for the short and long term, and this negativity will exacerbate the impact of fundamentals for the next few months. Crude prices have much to lose, as global anxiety and weather conditions could create a scenario where trading floors take a structural short position, or worst, commence short-selling tactics that feed a negative-slope price path for crude and product future contracts as far out as February 2031 (the date that is furthest away on the CME schedule).

With the weather turning colder and COVID cases moving upwards again, crude prices are entering the most sensitive time of the year, by far, and statements from corporations, governments and OPEC+ will make a big difference, as well as how trading floor participants react to all these variables in the short term. One potential major stabilizing factor for global markets will be the widespread availability of COVID tests, as it allow citizens to make sure they can differentiate in between a seasonal disease and COVID.

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