December Newsletter 2019: Oil Market Review

December Newsletter 2019: Oil Market Review

Oil price
Crude prices recovered as trade tension wears off and OPEC agrees to extend cuts.

As we race towards 2020, I start to reflect upon the achievements and failures of the past year. More specifically, my 2019’s New Year’s resolution to lose weight. In case anyone’s googling the definition, it is the goal that a person sets out at the beginning of every year to achieve. Typically, with the confidence of a lion but the conviction of a meerkat. I was on track to my goal after losing 4% before my inner meerkat kicked in. It lasted for about 5 weeks. Year to date, I’ve gained about 5%.

Speaking of things that bounced back and then some (yes, all that for this punchline), crude has recovered remarkably well after the rout in late September. Supported by both demand and supply-side factors, the price seems to be trending towards post-Saudi’s refinery attacks.

A major price driver has been the heavily scrutinised OPEC+ meeting on 5th December. It seems like the Saudis finally got fed up with being the one carrying most of the burden of supporting crude prices. After almost an entire year of non-compliance by some members (ahem……Iraq, Russia, Nigeria), Saudis warned the participating nations (ahem……Iraq, Russia, Nigeria) that further non-compliance would result in them no longer playing ball as well. It’s somewhat akin to the Saudis trying to row the OPEC+ boat towards the promised land of $80 crude only to turn around to discover a third of the boat crippled (Venezuela, Libya, Iran, Angola), which somehow is a good thing in this context. A third rowing weakly with the Saudis. The rest rowing backward because they like the sea breeze.

As such, the meeting concluded with the members agreeing to deepen the production cuts by an additional 500kbpd. However, the cuts were not extended and will still end in 3 months at the end of Q120 as per July’s OPEC+ meeting. While the official number is an additional 500kbpd of cuts amongst all OPEC+ members, the Saudis have announced that they will be continuing with their voluntary cuts of 400kbpd beyond the new quotas. Despite the additional cuts, the market gave a lukewarm reaction to the decision with only $1.00+ rally in prices post announcement. While the Saudis continue to do the heavy lifting in the new deal, it now comes with a thinly veiled threat. Perhaps the short timeline is for the Saudis to monitor compliance.

On to the demand side. True to his word, Trump has finally managed to get a trade deal done with China. That is if you stretch the definition of “done” by about a mile after you’ve reached Mars. US and China have agreed to a partial deal where the additional tariffs that will be implemented on the 15th Dec will not be imposed and the existing tariff to be halved from 15% to 7.5%. One heck of a game of brinksmanship as this was announced only 2 days before the 15th of Dec deadline. The world cheers as this chapter of the saga have ended.

It supported the equities market as global stock indexes rallied about 1% ~ 2%. Crude rallied about 1.5% across the same period. Formal ‘Phase 1’ deal will be signed sometime in Jan20 with both nations finally coming to some form of consensus and gave the world a decent Christmas gift. The thundercloud cast over the rainbow in this is that ‘Phase 1’ implies a ‘Phase 2’. Hmmm…. I wonder what would that entails or how long would that take? I hope that I will find that out before the election results.

For the fuel oil market, the long-awaited IMO 2020 is right around the corner. For those not in the loop, it’s the global initiative that bans the use of High Sulphur Fuel Oil (HSFO) containing 3.5% sulphur content in favour of the cleaner and less polluting Very Low Sulphur Fuel Oil (VLSFO) with a sulphur cap of 0.5%. With this fundamental change in the shipping industry, the major bunkering ports (ports that supply fuel to ships) around the world such as Singapore (Yay!), Fujairah (UAE) and Rotterdam (Netherlands) has begun stocking up of IMO compliant fuel oil with sales reaching a record high. Refineries around the world are also gearing themselves towards the production of compliant fuel oil.

We can already see the impact on HSFO prices as it dropped from a $9/bbl discount against crude oil in August to the current $25/bbl discount. As for the compliant 0.5% fuel oil sold in Singapore, prices have gone up more than 30% since August. All this volatility made a very good year for fuel oil traders if they’ve positioned themselves well. Shell’s fuel oil trading desk reportedly rang the $1 billion PnL bell in November. For shippers balking at the cost of fuel oil, they can still comply by installing exhaust gas cleaning systems called “scrubbers”. It’s about $1 million a pop and I hear the waitlist is about a year. There’s also the additional issue that some of these scrubbers are dumping the SOx produced into the sea instead of releasing it into the air, I wonder how long this loophole will be allowed to exist. In summary, I guess what I am trying to say is that……I think my Taobao shipping cost is going up.

USEP priceUSEP was largely depressed in Dec19 due to lower demand.

It has been an oddly cold December. It was the first time I contemplated wearing a jacket at home without the air-con on at full blast and turned down to 16 degrees (Yes. Since I’ve converted to iSwitch, I can afford to do so.) The low temperature resulted in some of the lowest demand days this year with peak weekday demand barely hitting 6,500MW. Low demand coupled with lack of outages in Dec19 led to some very low spot outcomes with periods of half-hourly spot prices on the 10th and 11th December reaching $0/MWh and prices on the 16th December going below zero.

However, prices are not expected to stay low as demand recovers with the temperature heating up and holiday goers returning. USEP has already crept up over $10 from the lows of December and volatility will likely return once Singapore returns to its sunny self again.

Before I sign off for the year, I leave you with this New Year jingle:

Silent Night! Oh my god!

Trump came through, with trade negotiations,

Round and round the tables they went,

Months and months of talks with no end,

Fi-na-lee they are at peace!

Now we move on to Phase 2!


Now remember, this only rhyme if you force it.

Happy New Year and all the best for 2020!


Zheng Tianbai
Analyst, Oil & Power
Written on 30th December 2019


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