January Newsletter 2020: Oil Market Review

January Newsletter 2020: Oil Market Review

Jan Oil Price
Crude price on Middle East tension before falling on concerns about coronavirus’s impact on global economy 

Finally, into 2020! Greeting from a new decade! How’s everyone’s new year’s resolution going? For me, I had a dream. It was a wonderful dream of eating healthy (relatively) and going to the gym twice a week this year. I was hoping that dream would last at least 2 months but alas, reality had other plans. The rollercoaster ride that crude markets went through this month meant that I have chugged more coffee than a hipster with an unlimited Starbucks gift card and have went to the gym a grand total of once (to shower).

Trump decided to start the year with a bang and drone-striked (not a word) one of the highest-ranking military official in Iran, Qasem Soleimani. It was the second trading day of the year and the oil market was immediately thrown into turmoil. Soleimani was in Iraq allegedly to send a communique between Iran and the Saudis to ease regional tension. He had just left the plane before an American drone took out his convoy. This was a major escalation as it was an outright assassination of a high ranking government official of another country.

The immediate reaction of the crude was a 6% rally as the markets prepared itself for the inevitable Iranian retaliation. This also stoked a wave of anti-American sentiment in both Iran and Iraq. In Iraq, the result was major protests on the streets of Baghdad against the Americans, to the point where the US had to evacuate their embassy staff, and the Iraqi parliament voting to expel US troops. In Iran, Soleimani was lauded as a martyr for a great cause. Associated Press reported at least 1 million people turned out to the funeral procession. The zealous crowd caused a stampede that killed at least 56 people and injured hundreds more. The funeral itself had to be postponed.

Crude markets had rallied on anticipation of war in the Middle East. Prices reached its highest point since Saudi’s oil fields were attacked last September. However, tension quickly fizzled out after Iran launched a coordinated missile attack on 2 US airbases. There were some damages to equipment but no casualties. Iran had warned Iraq about the attack whom then passed the message on to the US ground forces. This is widely seen as an effort by the Iranians to de-escalate the situation while sating nationalistic furore. As the price premiums placed on the potential conflict rapidly eroded, crude prices fell below pre-attack levels as concerns of an over-supplied market became the driver of prices once again.

So, one might ask, why in the world did Trump order the blatant assassination of Soleimani? Apparently……because Trump (this statement can now be used for a variety of problems). When the US top brass presented Trump with the option to assassinate Soleimani, amongst a variety of other options, when deciding on a response to Iran, they didn’t think that he would opt for the most extreme measure. Those extreme measures were there to make other options seem milder and were meant to suggest a more moderate approach. Lesson here? Never offer an option that you do not like, someone might just take you up on it.

Crude then extended losses on the new coronavirus that has swept through central China and beyond. The virus is similar to the SARS virus in 2003. It started in Dec19 with dozens diagnosed with an unknown form of pneumonia before numbers increased to hundreds. On the 23rd Jan, the Chinese government took the unprecedented step of locking down a Tier 1 city of 11 million people. By the 24th, 12 more cities are on lockdown affecting 41 million people. Major transport hubs being ordered to shut down and cities are beginning to restrict public transportation. Despite efforts, the rate of people diagnosed with the coronavirus seems to be rising at an exponential rate within China. Thankfully the outbreak is currently mostly contained within China with minimal contagion in other countries.

Many countries have since issued travel warnings and restrictions to China. Airlines have cancelled flight to and from the country as well. All this will result in a huge decrease in demand for crude products as people cut consumption due to reduced travel. The expected immediate impact on China’s oil demand is a 20% reduction or about 3 mbpd. There are refineries in China already trying to offload their pre-purchased crude supply given the demand disruption. Prices have since fallen 11.6% since the start of the year with no signs of recovery. Hopefully, we will see this whole thing blow over soon and life can carry on as per normal.

Jan USEP Price
USEP remained low due to low demand from the holidays.

Looking back at Singapore, there was some USEP spot price volatility at the start of January due to a generator trip however prices remained low in Jan20 largely due to lower demand. Fairly mild weather coupled with Chinese New Year coming early this year meant that demand recovery from the Dec19 holiday moods has proven slow. This might not continue to be the case as the monsoon season comes to an end.

It is hard to estimate the impact of coronavirus for Singapore demand yet as, in my personal opinion, we are still relatively well insulated. Nevertheless, precaution needs to be taken. The company HR was kind enough to offer all employee face masks and reminded us to constantly maintain our personal hygiene. Hopefully, if all goes according to plan, the virus will be a thing of the past by the next newsletter.

 

Zheng Tianbai
Analyst, Oil & Power
Written on 31st January 2020

 

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