August Newsletter 2019: Oil Market Review

August Newsletter 2019: Oil Market Review

 

Crude oil prices plunge amid escalating global trade tensions and political uncertainty

He’s finally done it. Trump has proclaimed himself to be “The Chosen One”, a messianic term that somehow strangely coincides with the announcement of the Matrix 4 movie. Except in this case, he’s more akin to Agent Smith (with luxurious golden hair and a bad tan) than Neo.

Trump doubled down this month against China as trade talks remained sluggish. Threatening an additional 15% levies against $300b worth of Chinese goods come 1st September. China retaliated by announcing an increase of tariff from 5% to 10% on $75b worth of US export. Brent prices dropped almost 7.5% after the announcement for the largest single day drop in almost 5 years. Momentum carried Brent down to $55.88 over the next couple of days, lowest since January and essentially erasing gains for the year.

Really can’t blame Trump for showing his frustration. China has been teasing the Americans all year long for a trade deal only to pull out in the last minute. it seems like the Chinese strategy is to drag and delay all talks till after next year’s November presidential elections. Hopefully by then, they could resume talks with a more reasonable American leader and hammer out a more reasonable deal. However, that’s a fairly big gamble to take. Of the 32 US presidents that sought re-election, only 10 failed to secure a second term. This is because it is inherently easier to run as the incumbent as the party’s votes are focused on a single candidate. The Republicans has only 3 candidates with the focus on their Chosen One. While on the other hand, the Democrats managed to cobble together one of the most ridiculous candidate pools in recent history with a whopping 26 candidates to boot. 5 has since dropped out, leaving only a gargantuanly miniscule number of 21, with majority of the votes split 3-way between Biden, Warren and Sanders. What could possibly go wrong with them running against a president that had, in this month alone, escalated a trade war (that he started but blamed everyone else), offered to buy Greenland (and threw a tantrum when Denmark understandably declined) and suggested nuking a hurricane? Speaking of which, I should be calling my doomsday bunker guy.

Returning to the oil market. Seems there are still buyers of Iranian oil. The tanker, Grace 1, that was impounded in Gibraltar last month was released despite strong protest by the US. Grace 1 pulled a Clark Kent by renaming itself Adrian Darya 1 after the release. That is if Clark Kent had changed into his Superman costume in the middle of the CDB. During peak hour traffic. With half of Metropolis leering on. The vessel dropped off the radar soon after release and have re-emerged at a Turkish port with no final destination declared. The entire market is now wondering who the buyer of the cargo is and how would they offload the cargo after such a high-profile incident.

And lo and behold, for I have found a part of the oil market that is still following market fundamentals instead of the POTUS’ twitter account. Fuel oil has seen a volatile month in view of the up-coming IMO 2020 rules. Come 1st January 2020, IMO will enforce a global 0.5% sulphur content cap on fuel used by ships to reduce harmful emission into the atmosphere. Ships will then have 2 primary options to comply with new regulations. First is to switch from the traditional High Sulphur Fuel Oil (HSFO) to Ultra Low Sulphur Fuel Oil (ULSFO) or they could continue burning HSFO and install scrubbers on ships to remove pollutants. Given that a typical scrubber takes months to book and install, any ship that has yet to install them by now would most likely have to switch to ULSFO or maybe even the significantly more expensive diesel to avoid risking penalties. As one can imagine, such a regulation would have a significant impact on HSFO prices. Fuel oil are generally priced at a discount against crude oil and in this month, the discount fell from -$6/bbl at the start of the month to a low of -$14/bbl, implying a widening discount of HSFO when compared to crude oil. Jan 2020 contracts are already pricing at -$20/bbl. This is the result of shipping companies increasingly shunning away from HSFO to a cleaner (and more expensive) fuel and will only escalate as the IMO 2020 deadline approaches. As the cost of transporting stuff around the world looks set to rise, I guess it’s time to maximize that RedMart membership.

Volatility in the spot market continues with a series of generator trips

Returning to Singapore and our power market. Spot remained volatile throughout the month of August. Price volatility in July got carried over to the first week of August before calming down a little. And, like the calm before the storm, a series of generator outages over consecutive days reintroduced price volatility into the spot market with prices spiking to as high as $280/MWh.

Zheng Tianbai
Analyst, Oil & Power
Written on 27th August 2019

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