Jan Newsletter 2021: Oil Market Review

Jan Newsletter 2021: Oil Market Review

jan 21 bruet crude

Crude continues to rally on surprise Saudi production cuts.

Happy New Year! I have been doing a little accounting for the past year (something I do grudgingly) and turns out I have saved a whopping $500+ on my electricity bill since Jan21, averaging at about $45 savings a month! Very glad that I have switched to iSwitch, pun intended, and join about half of Singapore on saving on my electricity bill.

What a chaotic start to 2021. Seems all anyone could talk about was how the collective wisdom (or insanity) of Davids on Reddit has managed an astounding victory against the hedge fund Goliaths. I bet when the old guards of finance thought of passing on the baton, they never would have imagined it being passed onto the meme lords of the internet. Alas, the oil market seems to be in a world of its own, little impacted by the turmoil that is currently awash in the equities market.

Nothing delighted the market more than a surprise 1mbpd production cut till Mar21 by the Saudis at the start of the month in an effort to deplete the world’s inventory overhang. It was a completely voluntarily and unilateral cut by the de facto leader of OPEC which was described as a “New Year’s gift” by the recently promoted Deputy Prime Minister of Russia, Alexander Novak (previously Russia’s Energy minister). Russia and Kazakhstan are allowed to increase production by 75kbpd in total and the other members of OPEC+ were expected to keep their production steady. Oil markets rewarded the further commitments with a $5.50/bbl rally in a single week.

Now the question is if the rest of the group is disciplined enough to keep true to their commitments and not be tempted by the rallying oil prices to sell more than they are allocated. Compliance in the past had been patchy, coupled with the uncertain production of the recently recovered Libya (that is exempted from production quotas due to recovery from conflict), the currently tight oil balance could tip the other way. But until then, compliance within OPEC+ have been stellar and the market seems fairly optimistic about the supply cuts. The surprise voluntary cuts also serve as a warning by the kingdom against those betting against the oil markets. The Saudi Minister of Energy said: “I have said this repeatedly and even advised that no one should bet against our resolve. Those who have listened are now bearing the fruits. The others – good luck with their ouching”. What a badass.

A little closer to home in Asia, an unexpected cold snap in the Northern Hemisphere sent all the power utility companies scrambling in the markets for additional fuel as electricity consumption for heating went through the roof. In the 1st week of Jan21, Japan’s power demand rose almost 14% compared to the same period last year as cold weather prompted consumers to turn up heating. The unexpected demand coupled with tight supplies of LNG (generation fuel) created the perfect storm for price volatility in Japan’s electricity wholesale market. Power demand hit 99% of system capacity in the western parts of Japan and to the point where the utility companies had to request customers to turn off non-essential appliances to conserve usage and maintain grid stability. The spot price cleared as high as 155 Yen/kWh (~SGD 2,000/MWh!!) for the highest day compared to the December prices of less than 10 Yen/KWh. This brings sharply into focus the potential challenges of being exposed to power markets.

The desperate search for fuel also sent the APAC LNG markets into a frenzy as utilities went to the spot market to look for additional fuel to power the generators. With an increasing demand for LNG as a clean source of fuel for generation and similar cold snaps across other parts of the world, LNG supplies were increasingly hard to come by on short notice this year. The JKM (Japan Korea Marker), a regional benchmark for LNG prices, that was trading at a low of $2/MMBtu last year due to low COVID demand and oversupply hit a record high of $32.50/MMBtu in Jan21. Trafigura actually bought a cargo of LNG at $39.30/MMBtu deliverable in Feb21.

jan 21 usep

USEP volatility subsides into a relatively calm start of the year..

Jan21 finally see some calm after a volatile Nov20 and Dec20. Singapore too has seen some of the cold snap mentioned above as the rain poured and temperatures dipped to record lows in the first half of the month. Unlike Japan, the cold weather has eroded demand as cooling requirements dropped and average demand fell by more than 200MW against Dec20 on the cooler weather. As the weather cleared in the second half of the month, USEP also recovered and rallied 20% over the last 2 weeks. It seems like the weather is starting to play an ever more important role in the Singapore power market.

As Jan21 passed, I really wondered if this year will be any different from last year. I am certainly more optimistic as vaccinations against COVID gets rolled out in Singapore and across the globe. Hopefully, all will be back to normal by July this year. Oh how much I miss the Lok Lok in Johor or the cheap food in Bangkok or just relaxing on the beaches of Bali. As you can clearly tell, I still occasionally get hit by a spell of wanderlust. How do I overcome it you ask? Well, the beaches of Sentosa here I come, with the SingapoRediscover Vouchers of course!

Zheng Tianbai
Analyst, Oil & Power
Written on 31st Jan 2021

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