July Newsletter 2020: Oil Market Review

July Newsletter 2020: Oil Market Review

July-20 bruet crude

Crude oil prices wavers in the low $40s on additional supply concerns.

I feel that month on month, my life has devolved into a series of ctrl-c and ctrl-v actions. I have optimized my COVID life so much that I can practically ctrl-shift-down-arrow an entire week without noticing the difference. Some might call this getting into tempo with the new normal. I call it devolving into telling Office-based humour. By the way, still waiting on someone send me the repaired version of the 2020.xlsm file.

Speaking of a rut (flawless segue), Brent crude has been holding firm in the mid-low $40s/bbl for the past 2 months as the market has largely balanced itself on the historical OPEC+ supply cuts. We have even seen crude inventory draws in the past months as crude demand recovers almost 15mbpd since Apr20 while supply cuts took hold. Rystad Energy estimates that demand has exceeded supply by almost 2mpd in Jul20. With prices largely recovering to Mar20 levels, some of the OPEC+ nations that are heavily reliant on oil money, which to be honest are pretty much all of them, would be heavily incentivized to start taking the opportunity to regain some of the lost revenues.

OPEC+ is expected to ease output curbs by about 1.5mbpd from Aug20 onwards as a gradual unwind of their cuts. This comes at the time of a heavily caveated demand recovery story. Global crude demand came roaring back in a spectacular fashion from 75mbpd to about 88mbpd from Apr20 to Jun20 after nations relaxed lockdown rules and China largely had the virus situation under control. It has since stagnated at about 90mbpd with little evidence of further recovery. We are now seeing a second wave of coronavirus amongst many nations with most showing little political will of executing another full lock-down (Ahem….US) in the event of a second wave, opting to favour partial lockdowns. This will probably prolong and further depress the recovery curve due to the lack of a coordinated recovery policy that would force public health officials to play a constant game of whack-a-mole instead digging in to remove the mole colony entirely.

Then again, they do have to balance the virus against the risks of a virtually stagnant economy. The US government has already thrown a $2.5 trillion cheque at the problem through assistance cheques and loans. They would most likely be throwing another $1 to $3 trillion more by the end of next month, depending on if the Democrats or Republicans get their way, as the assistance cheques are due to run out. That is a lot of money for any federal government to be handing out and it means a lot of sovereign debt. For the sake of perspective, Google’s definition of “trillion” is “a million million million” or the more relatable definition as “a very large number or amount”. Given how expensive it is to essentially artificially sustain the economy, it is no wonder that governments are highly reluctant to suffer through another Apr20-style lockdown. All these assistance money has, to some extent, propped up oil prices via a weaker USD. The US dollar index, a measure of the value of USD against a basket of currencies, has weakened almost 9% since its peak in Mar20.

Whilst the oil industry, in general, is going through a rough (300 grit sandpaper equivalent) patch right now, there have been a few than emerged unscathed or even stronger. Glencore reportedly earned $1 billion before interest and tax in 1H of 2020, almost topping profits for the entirety of 2019. Firms that enjoy a healthy balance since before the crisis would find ample attractive deals across the complex. The most significant deal as of late would be Chevron’s $5 billion acquisition of Noble Energy (not to be confused with Noble Group) that would grant Chevron a larger share of the vaunted Permian pie that has been the bedrock of the US oil industry. Nevertheless, the industry as a whole suffered a significant write-down on the value of their assets. With the troubles of COVID not yet behind us, I really wonder how the industry will fare the for the second half of 2020.

July-20 USEP

Electricity price edge higher in July as demand and volatility returns.

There is a slight uptick in average demand from Jun20 to Jul20. This is might be possibly due to a gradual return of economic activity amongst the retail industry. Also, with many companies adopting split team arrangements, there would be a recovery of office space consumption in addition to the sustained residential consumption uplift as family members rotate in and out of WFH arrangements. The average USEP price for Jul20 is expected to be about $13/mwh higher than Jun20. The market ended the month with a bang with volatility returning, perhaps this is a hint of what is to come as the industry tries to make head and heels out of who is consuming how much electricity.

With the daily community virus count plummeting to the low single digits, there should be a sustained recovery from here on out. Hopefully, in another couple of weeks, I can start doing my part in supporting local establishments such as bars, pubs, breweries, restaurants, and basically anywhere that provides me with alcohol that isn’t from my own cabinet. In the meantime, I guess I will have to make do with a more wholesome lifestyle.

 

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

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