Aug Newsletter 2020: Oil Market Review

Aug Newsletter 2020: Oil Market Review

Aug-20 bruet crude

Crude prices stabilize in $45 range on strong economic data and hurricane concerns

I have found a new kind of cereal. It is the same brand I have been having for dinner for the past 4 months but with different flavour/texture. I still find it incredulous that I have walked past it multiple times along the cereal aisle but never gave it a chance. No, I will not divulge the brand/flavour until they officially endorse me as their brand ambassador. And yes, that was one of the bigger highlights of my month.

Speaking of minor victories, crude prices have largely stabilized around the $45 range despite a 900kbpd production hike amongst the OPEC+ members. After a historic 9.7mbpd production cut agreement in May20 following a collapse in demand caused by the coronavirus outbreak, the consortium has been slowly supporting a recovery in prices while balancing supply against demand on a knife’s edge. The overall production cut has been eased to 7.7mbpd in Aug20 as per prior agreement despite some minor non-compliance amongst some of the usual suspects (ahem…. Iraq, Nigeria, Angola, and Kazakhstan). The Saudis managed to get some form of concession from the second-largest producer in OPEC, Iraq will be cutting an extra 400kbpd in Aug20 and Sep20 for their non-compliance from May20 to Jul20. However, given Iraq’s history of non-compliance, it will be a difficult target to achieve. That said, Iraq has reduced their export volumes by 200kbpd in Aug20 vs Jul20 so there may be active efforts to move towards the target.

Concern for hurricane Laura proved to be another boon for oil prices this month. The historic (lots of use for this word this year) Category 4 storm, strongest to hit Louisiana in 160 years, has shut down oil and refinery production across both Texas and Louisiana coasts. Over 80% if the crude production and 30% of the refining capacity across the Gulf have been shut in preparation for Laura.  Winds of up to 240km/hour (that’s Singapore to Kuala Lumpur in 1.5 hours) is expected as Laura smashed into the Southern US. The National Weather Service was quoted saying the storm is “unsurvivable” with waves up to 6 meters in high. Refinery margins have rallied given the shutdowns with gasoline and diesel margins rallying 12%. However, the rally is not expected to last as there is still ample refinery capacity elsewhere coupled with high product inventories. The Gulf Coast alone has about 90 million barrels of gasoline stocks. The path of the storm also seems to be steering away from majority of the Texas oil infrastructure which hopefully could come back online quickly once the storm passes.

Further supporting prices is the sustained falling of the US crude stockpiles. Numbers have been declines for 5 straight weeks with a drop of 4.7 million barrels in the last week of Aug20. US shale production is set to fall to a 2 year low of barely 7.5mbpd in Aug20 and setting overall US crude production to a 3 year low of 9.7mbpd, a far cry from the 13mbpd peak overall production just earlier this year. With oil firms cutting costs and shuttering left and right, would be hard to see a rapid recovery in production anytime soon as creditor tightens their purse strings.

On the demand side, we see recovery as Asia, especially in China, gradually keeps the virus contained. Asia’s crude consumption is reportedly largely back to pre-virus levels with China leading the charge. The most populous nation in the world imported a record amount of crude in Jun20, up 25% from a year before on cheap prices. There are warnings of the sustainability of this demand as recovery gradually tapers off. Jul20 imports were 3.6% lower after the record Jun20 numbers. In the US, gasoline demand recovery stagnates at 8.6mbpd after a low of 5.3mbpd in May20. Seems the low hanging fruits in-demand recovery is largely plucked. We would need to see an actual recovery in economic activity on a global scale to see further demand growth.

Aug-20 USEP

Electricity price edge higher in Aug20 as demand recovers

Demand recovery continues into Aug20. Average demand ticks up about 100MW from Jul20 to Aug20 with the trend expecting to continue as economic activity recovers. Bouts of volatility are still present within the market as historic demand patterns have been changed and forecasting becomes more difficult. Demand has been, and looks like it will remain, very fluid as everyone continues to try and figure out what business as usual will be like as we continue our efforts to contain the virus.

I feel like one of the few silver linings amongst all this is that I have become markedly healthier spending time away from my usual shenanigans. Have been actively cycling and overzealously attempting to follow Youtube exercise videos. So much so that my weighing scale has largely given up my high score. With the gradual re-opening of the Singapore economy and the very important need to support local business, I think I should do my part. Perhaps one day I can see that high score on my scale again.

 

Zheng Tianbai
Analyst, Oil & Power
Written on 31st Aug 2020

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