July Newsletter 2019: Oil Market Review

July Newsletter 2019: Oil Market Review

Brent-crude-oil-price-June-2019

Brent continues to recover on Middle East tensions but is suppressed by trade war and supply concerns.

I can’t believe it. I can’t believe that it’s been a year since I’ve started writing jokes on behalf of the company. I can’t believe that it’s been a year and the world is still as chaotic as it was. Mostly, I just can’t believe that iSwitch has allowed me to do this for a year. Enough with the sentiments, let us move on to more serious stuff in a less serious tone.

Looking that the tattered landscape that is Middle Eastern politics right now, I’m genuinely starting to think that international politics is not that hard. It’s all about balance; a tit for tat kind of game. Allow me to elaborate. Iran shot down an American drone over the Straits of Hormuz and a couple weeks later, US shoots down Iranian drone. Boom! Balance! UK seized an Iranian crude tanker on suspicion of violating Syria sanctions, Iran in turn seized a UK tanker. Boom! Balance! See? End of the day, it all comes down to squaring off your positions. Most of these “skirmishes” occurred within the tiny stretch of sea called the Strait of Hormuz where approximately 30% of global crude flows through. This harkens back to the Tanker War in the 1980s where hostility between Iran and Iraq effectively closed off the strait. Close to 400 vessels were sunk and any tanker that wished to pass the tiny stretch to sea had to have military escort. While the current situation pales in comparison to what it was, the memory from that conflict alone was enough to drive up insurance rates 1,000%. This also translated to an approximate $2/bbl premium on Brent prices.

The fabled OPEC meeting finally came to pass early this month after numerous rescheduling. While the meeting itself was at times in doubt, the conclusion of it was never. As expected, OPEC+ agreed to extend production cuts until at least Q120 in an attempt to reduce stockpiles around the world and support prices. After doing exactly what the market wanted them to do, traders around the globe ironically rewarded OPEC+ with a $2.50/bbl dip in oil prices. Apparently, not unlike my Asian tiger mum, the market expected OPEC to go above and beyond the original target despite being told the entire semester that meeting the target is just fine. Do keep in mind that the numbers discussed were expected productions caps. As actual productions numbers being released in the past month showed that OPEC as a group has in fact been more than compliant with production cuts by approximately 1.5 mbpd. However, that was primarily due to involuntary cuts from the members. Iran’s down more than 1mbpd due to sanctions, Venezuela down close to 500 kbpd due to crumbling infrastructure, Libya production is expected to report a drop as their El Sharara field shut down for 2 days and is now only operating at about 50% capacity. It’s almost like that time I told my mum I got top in class for a test but omitted the fact that a stomach flu wiped out half of my classmates.

Then, one may ask, why is the oil prices still so depressed? Brent prices never broke $70 despite all the conflicts and production cuts. Well, there are more than a plenty of bearish reason on the market. The US-China trade war remains ambiguous as both sides remain in talks with very little results AND the tariffs are still in effect. While OPEC and pals vigorously shave down their production, their shale rivals on the other side of the pacific were more than happy to pick up the slack. EIA projects US crude projection will top 13.3 mbpd by next year, up 1 mbpd from 2019, practically erasing most of the cuts by OPEC.

In addition to all that, Boris Johnson got himself elected as the Prime Minister of the UK. At which point the world goes “Eh?”. Then it makes sense when you realise his only opponent was Jeremy Corbyn and it’s a job that no one really wants. BJ vowed that he would stick to the Brexit timeline, and we could potentially see an actual Brexit come October. Quoting from the new PM’s first speech: “Awesome foursome”.

USEP-Price-July-2019

Spot prices this month turns out to be a lot more exciting that the last with multiple unplanned generator trips. Although daily prices still seem to be capped at around $300/mwh. This is a lot milder than the numbers we saw in Mar19 and Feb19 where daily high reached to more than $1,000/mwh. Aug19 futures contract for spot electricity rallied 7% over the past couple of weeks so evidently the concern of volatility this month spilled over to the next months as well. Is volatility the name of the game again?

Then there’s the new SP Tariff for the quarter, SP tariff reached a historic high at $259.20/mwh, up 6.3% from last quarter. This prompted a fresh wave of customer sign-ups as people realise the potential cost-savings that could be gained in signing with iSwitch.

Zheng Tianbai
Analyst, Oil & Power
Written on 26th July 2019

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