Feb Newsletter 2021: Oil Market Review

Feb Newsletter 2021: Oil Market Review


Crude rallies to above pre-Covid levels on supply cuts and demand optimism.

Anyone else feeling really lucky this Chinese New Year? Equities hit an all-time high, crude prices recovering to pre-Covid levels, bitcoin hitting record levels and I seem to be on an unstoppable mahjong streak. Seems财神爷(Cai Shen Ye, the Chinese god of money, dough, moolah, and all things shiny and expensive) has been gracing his presence amongst almost all financial products. Hmmm, perhaps after a year of Covid woes, we are finally getting some respite.

The impact of last month’s surprise Saudi 1mbpd production cut is still being felt well into this month along with strong compliance amongst its members. Seems the overall agenda of Saudi to reduce global inventories is slowly but surely taking shape. Global crude inventory is down almost 440 million barrels since hitting a peak in the second quarter last year. Whilst the market is indeed moving towards a price recovery direction, compliance is still a cause of concern amongst members. Compliance by Iraq has been lackluster so far. Since about the middle of last year, Iraq has produced above its quota by more than 600kbpd equivalent. That said, Iraq has agreed to cut more to make up for the additional production in the past. As such, the largest supply risk is still the spare capacity the rest of OPEC is withholding to rebalance the market. Collectively, they hold 7.8mbpd of production capacity with the Saudis having the biggest flexibility at almost 2.5mbpd. With crude prices surpassing $65/bbl, it will be an interesting OPEC meeting in early Mar21 to see if they can continue to hold a unified stance of restrained production with crude prices approaching pre-Covid levels. It will be a large game of prisoners’ dilemma but played out on a national level. Yikes! Would totally not want to be the warden of this game.

Another major contributing factor to the price rally this month was the cold snap in Texas as record low temperatures and snowfall shutters crude supply and refinery runs. The unusually cold weather in the southern state that is known for its expansive deserts and blistering heat caught everyone by surprise. With temperatures hitting -20⁰C in some cities, many Texans were unprepared for the chill with pipes bursting, power grid overloading (we will get to this later), and lack of heating. A state of emergency was declared by the federal government that effectively shut the entire state down. About 1.5mbpd of crude production with impacted, constituting close to 10% of US production. Several major refineries had announced partial or complete shutdowns due to power outages, logistical restrains, or damage to process units. This impacted 3.7mbpd or 20% of total US refining capacity.

The fallout of the Texas winter largely mirrored Japan in Jan21 where unprecedented amounts of electricity were being used for heating as the cold snap hit the country. On the supply side, the Texas grid also faced complications such as downed power lines and generation fuel logistics issues This coupled with reduced generation of renewable energies such as wind and solar resulted in almost 45GW of supply becoming offline for an extended period. The Texas grid operator had to resort to rolling blackouts to maintain grid stability while electricity prices spiked to unprecedented levels. Wholesale market price shot up more than 100-fold to USD$9,000/MWh. For Texas residents who were on electricity plans linked to wholesale prices, many ended up with significantly higher electricity bills, up to 70 times their usual amount or about USD$15,000, for the month of Feb21. While customers on wholesale price plans may enjoy slightly cheaper rates, they also expose themselves to violent price uplifts like what happened in Texas. One of the main purposes of purchasing electricity through an independent retailer (as with any market, including Singapore) is to pass on the risk of such extreme price movements to professional energy managers and avoid bill shocks like what happened in Texas.


Feb21 USEP volatility resumes with demand recovery due to warmer, drier weather.

Feb21 sees strong growth in average demand at almost 150MW above Jan21 and max demand at more than 250MW higher. This is due to a warmer and much drier month with an average max temperature of more than 2⁰C higher with less than half the rainfall relative to Jan21. Stronger demand coupled with a few unplanned generator outages brought volatility back to the Singapore wholesale energy market after a highly muted January. Feb21 USEP average to more than $15/MWh above Jan21 prices with highs of the month coming in at over $300/MWh.

Seems CNY this year is a lot cozier than usual. With the 8 pax limit, house visiting this year has become a highly pageanted event, largely in contrast to my usual annual rabbit-esq house hopping adventures. Of course, this makes me a lot more appreciative of every house I went to and its associated angbaos collected (thank you aunties and uncles and newlywed friends that I repeatedly hinted until you relented). Despite this, I do wish for a return to the norm where we could have larger gatherings and scream “YUM SENG!” at the top of our lungs in a 15-man chorus. With the rollout of vaccinations globally, that dream is no longer that distant. Until then, I wish you a happy Chinese New Year and a healthy year ahead.

Zheng Tianbai
Analyst, Oil & Power
Written on 28th Feb 2021

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