Commodity Weekly (October 30 2020)

While this week has seen a sharp reversal in fortunes for theoil price, it seems as if pessimism about the US’ ability to deliver production growth is infectious, if we can use such a term in these Covid-19 times.

Earlier this week, Dan Brouillette, US Secretary of Energy,disclosed that there is widespread scepticism that the US will be able toachieve January’s high of 13mm bpd anytime soon. However, he clarified isremarks by saying that the weakness will be driven by soft demand, not the inability to deliver what demand that there is. We still aren’t certain Brouillettespoke in his capacity as US Secretary of Energy, and therefore is an officialview, or as a private citizen expressing his own view.

As we have highlighted previously, there is likely to be a period where prices do not respond as working through inventories masks the point at which the supply/demand balance favours supply.

There is a risk, however, that by the time the inventories have returned to more normal levels, that the under investment inertia accumulated in intervening period, will take even longer to arrest, before it then recovers.

To that extent, there is a sense that the US market is having a crisis of confidence, which to our mind is driven by the decline in investor appetite.

Debt and equity investors were one of the key factors that drove the country’s production growth, making it a “commercial swing producer.” If those investors have gone, it could well be the resumption of the longer term decline that has been observed in US production since the 1970s.