June Newsletter 2020: Oil Market Review

June Newsletter 2020: Oil Market Review

June-20 bruet crude
Crude oil prices stabilize above $40s/bbl as market rebalances.

Congratulations Everyone! You made it! You made it to the halfway mark of 2020! We should just name the first half of the year as 2020 v1.0, hide it in your neighbour’s shoe cabinet and then start on v2.0. Over the past few months, I have discovered the wonderous world of Netflix. From eccentric/murderous tiger keepers to a fake story about a real song contest, it is a gift that just keeps on giving. Whilst I very much enjoy my current work from home set-up (yes, definitely not an example of Stockholm syndrome), I hope that with the COVID situation in Singapore largely under control, life would slowly resume normalcy. I think last year November would be a good reference point to start. I weighed much lighter back then.

Speaking of optimism, crude oil has had quite a bull run over the past few months. It has bounced back from a low of $15.98/bbl to a high of almost $44/bbl. After a historic production cut agreement in May20, total oil production amongst OPEC only members have dropped to 22.69 mbpd, down more than 6mbpd compared to May20. There was strong compliance in cuts even amongst the usual black sheep (ahem…. Iraq….). With Russia calling Saudi’s bluff during the previous meeting and supply/demand balancing on a knife’s edge, would be hard to imagine anyone wanting to actively poke the hornet’s nest. Looming somewhere in the background, however, would be the overhanging supply of oil piled up in storage across the globe. Markets may have been largely balanced for the time being but the glut of excess oil is bound to return to the market at some point and the impact on the market will largely be determined by the recovery of fuel consumption.

Another major contributor was the effective decline of supply came from across the pacific. Total US crude production has fallen from a peak of 13mpbd to 11mbpd over 3 months, mostly from the sharply disappearing shale production. News pundits have been effectively announcing the fall of the US shale industry after shale pioneer Chesapeake Energy declared bankruptcy and is seeking protection from more than $9 billion of debt. It is the bank equivalent of Lehman or me discovering that I was a tad over-zealous on the WFH online shopping deals. Devastating.

Almost 30 oil and gas companies have filed for protection or defaulted on their debt this year so far, with dozens more sharply revising down their valuation and expenditures. This would have a long-lasting impact on shale as lenders tighten their purse strings and review the highly cash-intensive business model that is shale oil. We might see further production declines from the US before this is over. Active rig counts this month is down to only 262 rigs in the US, almost 100 rig count decline from May20 and an all-time low dating back to the 1940s.

Demand for crude oil still largely falls onto the outlook on the global economy. With the virus slowly taken under control in most parts of the world, there are signs of a gradual return of economic activity. Nevertheless, even the most optimistic forecasts indicate that we would not recover to pre-COVID oil demand levels till 2021. One important assumption is that there is a global co-ordinated effort to contain the virus. Given the integrated nature of the global economy, any disruption along the chain of production to consumer consumption would cause ripple effects in its other components. Looking at the current developments of different countries flaring up at different times, we might have a while more to go before we are completely out of the woods.

Despite all this, oil prices seem to have stabilised within the $40s/bbl range and market seems fairly content with status quo. The later dated contract premiums have shrunken significantly with Dec20 deliveries premium against the nearest dated contract falling almost $0.70/bbl since the start of Jun20 and about $4.00/bbl from its peak in Apr20. Strong economic data from various countries along with tightening supplies lent fairly strong support for prices as did a strong equities market. If we were to only look at the oil market, it would lead us to the conclusion that the worst is definitely behind us and life will get back to normal soon. The big question remains on if we can get back to the pre-COVID heydays anytime soon, if at all.

June-20 USEP
Electricity price volatility was subdued in June.

With Circuit Breaker slowly being lifted across the country, we see a gradual recovery in energy demand. The average demand increased by about 130MW from May20 to Jun20 with peak demand recovering about 200MW to more than 6GW. While it is still quite a way off from the 6.4GW peak demand last Jun20, it portrays a revitalising economy. With the further opening of the economy, we expect to see a further uptick in demand as businesses return to operations. I am already looking forward to the resumption of staycations later this month. It is one way to both get out of the house while avoiding much contact with the rest of the community. So basically, my apartment but with a nicer view.

My electricity meter has finally been read this month. After correcting for 3 months’ worth of estimated consumption, my energy bill came in at a whopping 4 times my usual amount. Largely within expectations given the amount of time I spent at home abusing my aircon. Nevertheless, as the saying goes: “The punch still hurts no matter how much you brace for it”. Yes, I said that. About after 10 seconds after I opened my bill. Hopefully, with the re-opening of the office, I could shave off some energy consumption over the next few months. More importantly, I can finally get away from my own cooking. I’ve been complaining to the chef about the quality of the meals, but he never seems too receptive and constantly complains about the budget. What a horrible, horrible person.

 

Zheng Tianbai
Analyst, Oil & Power
Written on 30th June 2020

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