Sep Newsletter 2020: Oil Market Review

Sep Newsletter 2020: Oil Market Review

brent crude sep 20

Crude price fall on Libya production recovery

As we approach the final quarter of the year, I still find it incredulous that 2020 has passed in such a ridiculous manner. Then I watched the first US presidential debate and thought to myself: “It can get more ridiculous”. While I am fairly certain that most sane political pundits expected a messy debate, no one thought that it could get this chaotic. Poor Chris (the moderator) was largely ignored most of the night as the 2 candidates talked over one another and the talking points had more tangential offshoots than the best of my little cousin’s attempt to draw a tree. To say that it will be a bumpy road ahead to the presidential election in a month’s time is probably a huge understatement.

Now how does this link to oil? In a stimulus-driven recovery environment, all eyes are focused on the next bill passed by the largest economy in the world to continue to prop up the economy which is likely to be in the trillions regardless of who gets their way. Current negotiations are stuck in an impasse with the Democrats proposing a $3 trillion bill while the Republican proposed a leaner $1 trillion bill. Negotiations will likely stall with little compromise from either side, especially at a time where strength needs are portrayed ahead of one of the most divisive elections in recent history. Without a new bill, and with the previous stimulus quickly drying up on sluggish recovery, the impact on demand recovery could be fairly severe with a weakened outlook that will likely last through 2021.

The scale of stimulus will also likely impact USD expectations as the federal government continues to borrow/print more Franklins to fund the stimulus. The US Dollar Index, a weighted index of USD exchange rates against a basket of 6 major currencies, has fallen over 10% since Mar20 highs. A weaker dollar largely supports crude prices as it is denominated in USD.

Further bearish news came this month with Libya National Army, led by General Haftar, agreed to a truce with the UN-backed Government of National Accord that lead to a partial restart of the country’s oil fields and terminal. Home to the largest proven oil reserves in Africa, Libya has the potential to bring back more than 1mbpd of production with their largest oil field, the Sharararara (Never quite got the number of ‘ra’s down) field capable of production up to 300kbpd of crude. Libyan production has already recovered up to 250kbpd as of this month, almost 3 times the production since before the ceasefire.

A slight boon for prices this month comes from a surprise 4 million barrel inventory draw in the US. This prompted a 4.9% rally in crude prices overnight. However, the continued glut of excess inventory remains a major consideration in the industry, especially when it comes to the distillates such as diesel and jet fuel. As the travel industry remains depressed, recovery in demand for these products still seems bleak with projections hinting that the travel industries being permanently scarred by the Covid outbreak. US distillate inventories now sit at the highest levels in the 1980s.

On an interesting side note, VLCC(Very Large Crude Carrier) rates see massive declines since Mar20 ~ May20 highs as the contango in the oil curve narrows. Back in Mar20, the front-month contract traded at more than $12/bbl discount to the 6-month forward contract. So a trader can buy crude at a massive discount, find somewhere to store it (land storage, ships, pipelines, or parent’s basement), and sell it 6 months later at a huge profit so long as storage costs are lower than the discount. This prompted a mad rush by traders to find places to store their cheap crude with VLCC rates peaking at almost $250k/day. With the current 6-month contango narrowed to less than $2, the play now seems a lot less profitable. VLCC rates have since dropped to the low $6k/day.

USEP sep 20

Bout of volatility due to multiple unplanned generator outages

Back home in the Singapore electricity market, average demand fell about 100MW in Sep20 against Aug20 on largely cooler weather and higher rainfall. More notably, off-peak demand fell by almost 150MW, likely due to the residential demand responding to cooler weather. However, cooler weather and lower demand does not mean prices became cheaper as one would expect. Volatility returns this month due to multiple unplanned outages occurring towards the last week of Sep20. The generator trips upended the supply side of the equation, spiking USEP prices up to almost $800/MWh, the highest price for the year.

 

Zheng Tianbai
Analyst, Oil & Power
Written on 30th Sep 2020

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