Aug Newsletter 2021: Oil Market Review

Aug Newsletter 2021: Oil Market Review

BRENT CRUDE AUGOil price whiplashes about on talks of higher interest rate and hurricane season.

I have been fully vaccinated!!! Mild symptoms aside, I felt perfectly fine and was back up hopping about in less than a day.  With vaccination rates in Singapore soaring towards 90 percent, we might actually be able to overcome COVID-19 by end of this year, just in time for Christmas! In the meantime, HDL, KFC, BKT, BBT here I come!!! Throw me all them other delicious acronyms that I can now dine in at!!!

That said, elsewhere in the world, the Delta variant is spreading havoc. The variant has landed in almost every continent in the world with it now being the dominant variant among Covid patients. This has led to a slew of lockdown in the most populous nation in the world, China, along with several other nations. China factory activity expanded at a slower rate in July along with disappointing trade figures. Crude imports also slowed to under 10mbpd for the 4th straight month. Seems despite the spectacular double-digit economic growth of 12.7% during 1H21, the growth outlook for the 2nd largest economy in the world is beginning to taper.

On the other side of the world, the United States’ Road to recovery continues on its jolly way. Aug21 non-farm payroll increase by 943k, indicating a resurgence in the US labour market. The increase in employment figures comes within expectation as the states exit from Covid restrictions and allows the battered F&B, hospitality, and airline industries a few moments of respite. The natural assumption for the strong showing would be that it will lead to upward pressure on oil prices due to stronger expected demand growth.

However, the story comes with a twist. The US federal reserve has been looking to raise the long-suppressed interest rates but always suffered from bad timing. F The coming of Covid has derailed their plans as it would be kind of an inappropriate move to raise the cost of borrowing during a crisis. So as the US economy comes surging back along with equity markets seemingly hitting historic highs every other week, the federal reserve is now twiddling its thumbs and wondering if now is the time to finally raise central bank rates. With the latest comments from the Federal Open Market Committee, the Federal Reserve is on track to announce a tapering of its bond program sometime around Q321. Stepping back from its bond-buying program would be step 1 in a series of moves that ultimately ends in higher interest rates. This expectation of higher interest rates propelled the US dollar index to the highest point since Q4 last year. The rallying USD puts downward pressure on oil prices as with the USD now valued higher against other currencies, it will cost less USD to buy each barrel of oil.

The one saving grace of oil prices in the past month was the arrival of hurricane season in the US. Hurricane Ida was first seen in late Aug21 and quickly evolved into a Cat 4 hurricane. It started in the southwestern Caribbean Sea, grew in intensity over a short 3 day period, and rapidly swept through Gulf Coast. The storm forced the closure of most of the oil production facilities in the region that accounts for 12.5% of overall US oil production capacity. Widespread power outages due to hurricane damages also delayed restart time for many of the facilities and refineries. The outages resulted in a rally in oil prices as oil and product supply becomes temporarily constrained.

USEP AUGUSEP hits 9-year high on gas constraints.

Late Jul21 sees a major gas curtailment (gas is the primary fuel source for Singapore’s power generation) that resulted in a generation supply constraints. USEP spiked up to more than $1,500/MWh for a few pricing periods in Jul21 and $1,900/MWh in early Aug21. These are prices not seen since 2013 with the Jul21 month average also at a 6-year high at over $167/MWh. The second half of Aug21 sees volatility subsiding and gas supply normalise and demand tapering off due to cool weather. We see average demand drop by about 150MW from Jul21 to Aug21 with max demand dropping close to 200MW.

As we approach Q4 of the year, I am faced with an increasingly difficult choice. How do I clear my leave days? Over the past 1 year, I have done almost everything that Instagram Ads have recommended me to do and have since run out of ideas (food aside of course). Ah, how I long for the sweet release of overseas travels. But! That will have to wait. While Singapore is miles ahead in its vaccination program, we will have to wait for the other nations to catch up before borders can open again. In the meantime, I can only scroll through the travel blogs and simulate that Bali sea breeze with a fan and a bowl of saltwater.

Zheng Tianbai
Origination and Trading
Written on 1st Sep 2021

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