December Newsletter 2018: Oil Market Review

December Newsletter 2018: Oil Market Review


Crude price continues to hit new lows as worries of supply glut and waning demand looms.

Merry Christmas!!! Hope you enjoyed the month as much as the oil bears did. Oil prices went on a bumpy ride as December turned out to be a hectic month; OPEC meeting, the on/off relationship between China and US, Canada unexpectedly cutting production and Brexit.

But first! OEM!!! JANUARY 2019!!! ZONE 2!!!! Close to a third of eligible residents in Zone 1 and Jurong have already switched from SP to independent retailers and enjoying more than 20% savings on their monthly electric bills. Which also got the rest of Singapore, me at least, drooling away at the cost savings. While some may consider monthly savings per month too negligible to warrant the effort, but a wise man once told me: An extra hundred to two hundred dollars each year never hurt anyone. And I always take my own advice.

If you have paid attention to the news in the first half of this month, you might think oil is due for another bull run but the reality is a little more nuanced. Let’s start with the OPEC meeting. There was drama before it even began. Qatar made OPEC history as the first Middle Eastern member to quit the organization since its founding. However, markets shrugged it off as a symbolic gesture as Qatar is only responsible for less than 2% of the global crude production. It did signal the waning influence of the Saudis within OPEC. By the end of OPEC meeting, OPEC agreed to 800kbpd cut in production starting next year. OPEC+ (really just Russia) agreed to a 400kbpd cut.

Every member is due to feel some pain with exception to 3 production cut waivers; Iran, Venezuela and Libya. Even if OPEC were to remain at status quo, Iran’s production would be affected by the US sanctions, Venezuela’s continued infrastructure crumble would mean that more oil would be leaked back to the ground than exported and Libya……. well……has a civil war, foreign government intervention (eyes squints to US and Russia) and its largest oil field, El Sharara, got shut down by militants demanding to be made employees of the NOC. So basically, OPEC agreed to waive production cuts from 3 countries whose crude production would’ve dropped anyways.

The proposed 1.2mbpd cut buoyed the crude market by about $4.50 before the 3 waivers logic turned on them. Here’s how the thinking goes: Oil market’s collective aim is to cut 1.2mbpd. If Iran, Venezuela and Libya will do part of the job anyways through a series of unfortunate events, then everyone can relax and produce a little more oil! If you believe in that train of thought, then 1.2mbpd cut would then work out to be less than 1.2mbpd because like most OPEC math equations, something always leaks.

Despite supply side doubts, demand side did start to look a little rosy. China US trade war seemed to tone down a little with officials on both side restarting their dialogues, with China seemingly willing to give some concessions to US demands. News of this rallied both the equity and commodity market. Then Canada had to go make things awkward by arresting Meng, the then-CFO of Huawei, alleging that Huawei violated Iran sanctions and saying it’s all on US’ orders. Now Canada is caught in a “tit for more tat” crisis with China as China arrested 2 Canadians on completely legitimate charges (according to the Chinese government) and in no relation to Meng. I just hope that there’ll be no further escalations as I’m fairly certain that even with a 5:1 arrest ratio, Canada will run out of people first!!! The upside is that the Commander-in-Chief (the Washington one) tweeted that he’s willing to pardon Meng if it meant a good trade deal. Ahhh……God bless capitalism.

To which I’ve parodied a Christmas jingle to celebrate this year’s biggest star:

You better watch out, you better not cry
Better not pout, I’m telling you why
China Tariffs are comin’ to town
Trump’s making a wall and checking it twice
Gonna wall out all the naughty and vice

China Tariffs are comin’ to town
He tweets when you are sleeping
He tweets when you’re awake
He knows if you’ve been bad or great
So be GREAT for greatness sake!

Merry Christmas and Happy New Year!

Zheng Tianbai, Analyst
Written on 20th November

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