June Newsletter 2019: Oil Market Review

June Newsletter 2019: Oil Market Review

Brent-crude-oil-price-June-2019

Brent recovers from May19 to above $65 on Middle Eastern tensions and recovering trade relations

I…. have officially ran out of oil jokes. I’ve scoured my mind for something that might escape my boss’s censorship. Zero. Zilch. Nada. Nothing. Emptier than my sake bottle on a Friday night. So, this month, instead of a bunch of corny oil analogies, I’m jumping straight into the news. Brent was heading to what almost looks like a bear market, with excess supply and trade tensions, and got turned around with yet another attack on oil tankers in the Straits of Hormuz. Coupled with OPEC reaffirming their productions commitment and Trump doing his usual Russian roulette policy on trade, Brent rallied more than $5.00 over 2 weeks.

The big news this month was the attack on the 2 tankers, Front Altair and Kokuka Courageous, along the Strait of Hormuz. This is in addition to the 4 tankers that were attacked last month in the same region. While neither tanker was actually carrying crude, Altair was carrying Naphtha and Kokuka was carrying Methanol, crude prices spiked on additional risk premium on a shipping lane where about 30% of the global crude flow goes through. In the 20 minutes since Associated Press did the preliminary report on the attack, the market was awash with rumours. No one, apart from the people on the ships, knew what was really going on and treated every snippet of information they could find as their version of the holy grail. During that time, the rumour was that the tankers have been shelled (the artillery kind), torpedoed, boat kamikaze-ed and/or sea mined. The tankers were simultaneously both perfectly fine, both sinking and only just the one that was sinking (thanks Iranian news). And I was sitting here thinking the world is 1 tweet away from another world war. Well…. technically still is but you get my point. Thankfully, neither ships sank but the truth of the matter remains murky.

Official statement from the American and allies was that Iran was responsible for the attack but the there are some doubts on the matter. Japanese Prime Minister Shinzo Abe was in Iran that week trying to repair relationship between Iran and……everyone. The talks seem amicable with Abe telling Iran to be nice and Iran replying that they will be nice if everyone else (ahem…. Trump) is nice too. He was also due to leave Iran the day after the attack. Now the catch here is that the Kokuka Courageous is owned by the Japanese firm Kokuka Sangyo. So one could imagine the awkward conversation the 2 leaders must’ve had the morning after. It’s like going to your aunt’s to calm a fight only to discover your uncle ran over your mailman the night before. What can you really say after that? Do you still sue for world peace or think about your mail?

Another big event on most trader’s minds is the OPEC meeting that was supposed to happen last week to happen this week only to be happening next week. While there is general consensus among members on maintaining current production cuts to prop up prices, one could never be too sure. A more interesting topic would be their response to US shale. Since beginning of this year, shale production has increased 0.8mbpd, undercutting OPEC’s production cut efforts of 2.3mbpd reduction. While OPEC has officially stated that it will do whatever is required to rebalance the market, it comes at a risk of losing market share and ultimately, influence on price. All the while having to maintain good relationship with the Americans.

Almost immediately after the OPEC meeting is the G20 where the highlight of the show would almost certainly be Trump and Xi. For months now, both sides have stated that they’ll back down if the other side does and given their strongman mentality, it’ll be a while before either side blinks. Despite current tariffs, both sides still have more ammunition to expend. US could still sanction more Chinese companies and trade goods worth billion. The China is the largest creditor of the US government and holds the rare earth card. While I understand that politicians certainly like comparing the size of their arsenals, it’s never a good scenery for all the on-lookers. One might never know if he’s in the splash zone too.

USEP-Price-June-2019

Depressed spot prices persist into Jun19 as planned outages got cancelled

In regard to the Singapore electricity price, spot USEP outcome remains depressed this month as market remains in a state of oversupply. While there were multiple simultaneous trips towards the end of this month, spot reaction remains surprisingly subdued. With the 24th having 3 generators declaring unplanned outage resulting in a mere $35.00 increase in day average USEP outcome. Jun19 SGX futures is suggesting a mid $90s outcome. May19 averaged $93.28. Then again, we should not discount any form of volatility. Both Feb19 and Mar19 have seen prices spiking above $1,000.

Onwards to OEM. Market has seen its first consolidation as iSwitch took over Environmental Solution (ES)’s B2B and B2C accounts with over $15 million dollars’ worth of retail electricity contracts. Months of hard work finally paid off as we tried to make the transition for our customers as smooth and seamless as possible. Given ES’s dedication to green renewable, it would only serve to reinforce iSwitch’s commitment to the environment and being the largest green retailer in Singapore. That and it pushes HR one step closer to planning the 75,000th customer party.

Zheng Tianbai
Analyst, Oil & Power
Written on 27th June 2019

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