February Newsletter 2020: Oil Market Review

February Newsletter 2020: Oil Market Review

bruet crude oil price feb

Brent hits year low on worries about Coronavirus disrupting global demand.

The headline of the month (and perhaps the next few) is the Coronavirus outbreak. Markets have been reeling from the shocks of the virus on the global economy and have sent markets into pretty much a free fall. Equities are down 7.5% ~ 9.0% from its historic highs in 2 weeks. Brent is currently trading below $52.00 it started the year at $61.70, down over 15%. Only the usual safe havens’ prices are up, namely precious metals, USD, Yen, hand sanitizers, and my Netflix subscription. As I browse through my Twitter feed (the one true arbiter of reliable news), even the usual market bulls are finding it hard to spin a positive outlook.

The Trump administration came out and openly gave investment advice. Larry Kudlow, the top economic advisor for the administration, told the Washington Post that investors “should seriously consider buying these dips”. Whilst this is not untrue, the follow-up question would be: “When?” The market’s response so far has been a resounding “Not now”. Trump has regularly placed a correlation between his presidency and the equity markets (by proxy the American economy). It has mostly worked in his favour thus far. Both the S&P500 and Dow Jones has rallied to historic highs this year. So, from his point of view, the slide in equities would be unfavourable to his re-election campaign. Wouldn’t be surprised if a couple of weeks from now he would start declaring buying equities would be the American thing to do.

Brent has fallen to a 14-month low on expectations of lower global demand. Some market analysts are even estimating that global oil demand growth will either be stagnant or be actually negative.  While the most populous nation on Earth (China, for those of you wondering) is attempting to resume business as usual, the nation is restricted in almost every sense of the word. Citizens are encouraged to stay at home and there are cities still on lock-down. Large portions of the Chinese economy are still effectively not in operation. Baidu’s migration index suggests that only a little more than a third of the migrant workers have returned to the cities even after the prolonged Chinese New Year holiday. Feb20 Chinese demand for crude is expected to be reduced by 2.9M bpd as demand for jet fuel, gasoline and diesel falls off a cliff.

Further worries arise as Corvid-19 cases are starting to appear around the globe. South Korea, Italy, Iran, and Japan have hundreds of cases on their hands and their respective governments have started to take on additional measures to contain the spread of the virus. Currently, only Russia, the African nations and the Americas seem relatively isolated. However, the impact on the global supply chain is readily see. China is essentially the factory of the world with 20% of the global retail supply chain being reliant on it. South Korea and Japan are the go-to countries for high-quality semiconductors and chips that are used in practically every device we own. This is one of the theoretical cases against globalization that my professor in university taught that I hoped never to see. The current global supply chain is extremely integrated across all continents and this diversifies the risk of a single part of the chain failing. However, if the entire chain comes under prolonged stress conditions as is occurring now, things could unravel very quickly. That said, governments are already planning to cushion the impact of the virus on their respective economies. In the coming months, we will very likely see stimulus packages being dished out to industries in need and further lowering of interest rates as governments shore up their economies and stimulate growth.

On the supply side, there were some involuntary reductions in production from Libya and Venezuela. Libya’s production has fallen from 1.2mbpd to less than 0.2mbpd due to an escalation in conflict since late last month. The LNA (Libyan National Army) led by General Haftar has been in constant conflict against the internationally recognized Libyan government for almost a year for control over the country’s capital of Tripoli. To pressure the government, LNA has blockaded most of the major port and refineries, cutting off the financial lifeline for the government. Adding to the supply cuts, the US placed sanctions on a Rosneft’s trading unit for purchasing Venezuelan crude and maintaining ties with Venezuela’s national oil company. Rosneft was responsible for shipping out half of Venezuela’s 1.7mbpd production which has since ground to a halt.

Despite the supply disruptions, it was insufficient to halt crude’s freefall. All eyes are on the OPEC+’s meeting starting the first week of Mar20. The initial market expectation is that OPEC+ would collectively grant a 600kpbd cut in production to support prices. However, judging by the state of matter, cuts might have to be deeper to balance against the short term drop in global demand.

usep price feb 20
USEP remained low due to low demand from the holidays.

Feb20 started with an initial bout of price volatility due to several unplanned generator outages. USEP spot averaged almost $140/MWh for the first 4 days of Feb20 with the highest prices coming in at more than $570/MWh. The remainder of the months has been relatively quiet, and this is probably due to lower demand from general colder weather.


Zheng Tianbai
Analyst, Oil & Power
Written on 28th February 2020


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