January Newsletter 2019: Oil Market Review

January Newsletter 2019: Oil Market Review

Brent-crude-oil-Jan-2019Crude price dips below $50 at end December 2018, hitting a 16-months low on supply concerns, before rebounding back above $60.00

Happy New Year! Is it just me or does January feel like an excruciatingly slow month? Hours just chipping away as I await the arrival of Chinese New Year and the inevitable demise of my new year’s resolution. I aimed for 10% body weight loss by June and to reward myself for penning this down (more like a mental note), I’ve rewarded myself with a month of buffets and drinks.

Speaking of gains, Brent has finally rebounded back above $60.00 after months of tormenting the oil bulls. I guess $50.00 oil is just too good a value to pass up for the traders out there as everyone just starts asking themselves: “How much lower can it go?”

True to their word, voluntarily or not, OPEC+ have mostly capitulated to the price collapse and once again agreed to cut production to rebalance the market. The consensus from the December OPEC+ meeting was a collectively cut of 1.2mbpd with OPEC cutting 800kbpd and Non-OPEC responsible for the other 400kbpd starting Jan 19. Before January even started, OPEC has reduced its production by 530kbpd with Saudis leading the charge at a 420kbpd reduction. Russia, the biggest producer in Non-OPEC, however, was not as enthusiastic. Apparently, it is difficult to cut down production due to bad weather and is not expected to cut until mid-Jan at the earliest. Nevertheless, the reduction in supply still buoyed oil prices.

Other supporting factors that gradually unfolded in January included the increasing political instability in Venezuela. Pity that a country with the largest oil reserves in the world could barely squeeze out 1.2mbpd production and production is forecasted to drop even further. Russia promised monetary aid but even if the promise of cash does come to pass, it would be years before Venezuela would return to its former glory of almost 3mbpd. Adding the non-existent fuel to fire, a political upstart named Juan Guaidó recently challenged the legitimacy of the sitting president Maduro, with the backing of the US and majority of South American countries. If memory serves, the last protest against Maduro in 2017 ended with hundreds dead and the backbone of the opposition broken. Many view this as a morbid cycle of whack-a-mole with Maduro and his military holding the cudgel. Either way, political uncertainty will add to the increasing supply concern in the coming months.

Another important factor is the impending expiry of the Iran sanction waivers. The last round of waivers came at a surprise as it was announced amidst the Trump administration’s trumpeting (yes, I did it again) their tough stance on Iran and barely a week from the beginning of Iran sanctions. Which had the entire oil market going “HUH?”. We have since learned that Trump’s words are only as good as his latest tweets and his latest tweets are only as good as that bottle of wine that I opened 2 weeks ago. So, there’s much uncertainty when the administration declared that there will be no further extension of waivers. Nevertheless, some in the markets took this as another bullish sign that it could potentially reduce crude supply by another 900kbpd.

Counteracting supply reduction efforts on the other side of the Pacific would be the United States. Thanks to tight oil production and a total disregard to OPEC+’s decisions, US has surged to close to 12mbpd. Allowing US, for the first time in history, to be a net exporter of crude. Supply has surged more than 2mbpd in 2018 with very little signs of slowing down. The only reprieve (and hope) for the traditional suppliers is that in the attempt to rapidly expand shale production, US sale firms overleveraged themselves by borrowing high interest loans. With the increasing cost of borrowing and oil price volatility, investors might be spooked by defaults just enough to not want to invest in further tight oil projects. Given the (relatively) rapid rate of depreciation of shale projects and firms kamikaze-ing themselves into oblivion, it could really hurt the fundamentals of the industry in the long run.

USEP-Price-Jan-2019

After the (relative) Christmas calm, January has turned our to be a volatile month with numerous unplanned outages.

Closer to home, January USEP spot turned out to be a lot more volatile after a December respite. A couple of $200+ days easily spiked January prices up to $145 before retreating after volatility subsided. I guess everyone in the market had a flashback to October. All the while I was in office pondering which other product in the world spikes by 50% then drops another 20%. Well…there’s bitcoin but we don’t talk about that anymore……

Meanwhile, OEM has started to turn from a slow morning jog in the park to a 100m dash with all the retailers ramping up their marketing to get everyone to switch from SP. Well, I switched (get it? Because iSwitch?) because of the hundred odd dollar of savings that nicely offsets my plane tickets to Bali in 3 months’ time. Which got me thinking……. where should I fly to next year?

Zheng Tianbai, Analyst
Written on 28th January 2019

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