Brent briefly touched $86.74, a level not seen since October 2014, before retreating to August levels.
Winter is coming. No, not a reference to Game of Thrones. No, it’s also not just a literal reference as we march on into November. It’s a metaphorical winter for all the oil bulls out there. Barely a month ago, the market was teeming with oil optimism, with traders banking on ever rising oil prices. Even $100 oil wasn’t out of the question as volume for $100 Brent call options went through the roof. Then the roof collapsed and took the floor along with it. Over the span of 3 weeks, Brent crude drop about $10.00.
The cause of this winter? Trump! Still in his November election fervour, Trump continues his crusade against the purported enemies., and the injustice done on the American economy. While it does make for great election speeches and talking points, it’s not exactly good economics material. In the forefront of everyone’s minds are the US vs China tariffs and yes, they are still slapping each other (with tariffs) with repercussions to the global economy. Given that neither side is willing to back down, we end up having a Mexican standoff while the town burns.
The weight of the tariffs is already being reflected on the equities market. The S&P500 reached a historic high in September, buoyed by strong earnings, before being bludgeoned to quasi-death back to January numbers. The Dow Jones Industrials followed a similar trend. Their Asian counterparts faired much worse. Shanghai Composite Index is down by 22% year to date, Hang Seng is down by 18% year to date. Basically, any millennial that took Buffet’s advice and invested their savings into Index Funds are scratching their heads right about now and wondering what they did wrong.
With that, oil prices are now in limbo territory. Much like the Twilight Zone and the last season of Lost, nobody really knows what’s going on. Barely a month ago, the picture was clear. It was as easy as ticking checkboxes. Strong earnings? Check. Strong expected demand? Check. Iran sanctions still on? Check. Venezuelan production still crumbling? Check. See? Easy! Now, with demand in doubt, a weakening outlook for the global economy and buyers still hoping for a last-minute Iran sanctions waiver, the checklist is becoming a lot murkier as traders try to weigh the impact of demand factors against supply factors. Then you add Saudi and Russia into the supply mix and you’ll have a whole pot of “I don’t know what will happen”.
The Iran sanctions are scheduled to kick in on 4th November and many nations have already either cut down on crude imports or halted them entirely, it seems even China is pausing for now. This had resulted in the perceived tightness in the market for the past few months. That is until recently. Russian energy minister Alexander Novak said he sees no grounds for reducing production and that there are risks of a deficit in oil supplies. Saudi energy minister Khalid Al-Falih stated OPEC was in “produce as much as you can mode.” Those were clear bearish signals that dropped oil prices by about 5% last week. Then again, oil is a fickle lady. She dances and jives to the latest tune she hears. With the $1.50 recovery on the 26th, I’m presuming she heard the latest one hit wonder, “I did the math and realised that the Saudis and Russians might not make up the supply canyon left in wake of the Iran sanctions”. Not the best song title but the tune was groovy enough to tap dance Brent prices back up above $77.00.
Let’s look at the USEP spot this month. October started with the generator reliability issues that caused the most volatile electricity week since the market began.Be wary of your next bill! If you are buying from the spot market, don’t hesitate to contact iSwitch for a competitive deal.
This whole month seemed very surreal to me. Then again, who am I to say what is real and what is not? When asked about his tariffs by the Wall Street Journal, Trump replied: “Where do we have tariffs? We don’t have tariffs anywhere.” That got me thinking; Is this the real life? Is this just fantasy? Maybe one day, Trump will wake up and renounce his tariffs on twitter. Until then, oil bulls who’s bet on $100 oil will be chanting the eternal words of Freddy Mercury: “Just gotta get out. Just gotta get right outta here!”
Zheng Tianbai, Analyst
Published On: 30th October 2018