June Newsletter 2021: Oil Market Review

June Newsletter 2021: Oil Market Review

BRENT CRUDE JUNOil price rallies on failed Iran talks and tightening crude market.

Woohoo! My long-awaited vaccination is finally here! One of the downsides of being not too young and not too old (wink wink) is that I am pretty much all the way at the back of the line when it comes to vaccination priority. But! Never mind that! IT’S MY TIME! With the successful progressive rollout of the vaccination program in Singapore and beyond, I could soon be looking forward to sipping Mai Tais on the beaches of a-place-that-is-not-Singapore. :’)

The optimism that Iran’s President Hassan Rouhani was fairly short-lived, or rather dragged out so long that the market pretty much gave up on it. The US has attempted indirect talks with Iran since Apr21 to compromise on a nuclear deal that could lift the Iranian sanctions and potentially bring back 1.5mbpd of crude production onto the market. After 6 exhaustive rounds of negotiations over 2 months and Iran’s outsized optimism, the elusive final agreements still seem out of reach with both sides still in disagreements on major points. Iran is demanding immediate access to US markets and restoring access to the international banking sector while Western powers want the deconstruction of the recently completed advanced centrifuges that produces highly enriched Uranium.

Additional complications were added to the already tense pot with the election of Ebrahim Raisi as Iran’s president, a hardliner that was sanctioned by the US in 2019 for his alleged role in mass executions and crackdowns. He is due to take office in Aug21. Seems the US has also tried to portray a hard-line stance via airstrikes against Iran-backed militia groups in Syria and Iraq. With the talks seemingly in limbo, the western powers may be considering taking a breather from talks until the political transitions in Iran is complete. The virtual breakdown of talks boosted price confidence and propelled Brent prices to a 3-year high.

While Iran talks withers, OPEC and friends have been actively wondering what to do with all that Iranian crude that would not be appearing on the market anytime soon. With crude prices at a recent high, there is a general expectation of an increase of 550kbpd to 1,000kbpd in crude production shared amongst the OPEC+ group as a means of gradually ramping up production during their next meeting. There are also signs of physical market tightening with oil stockpiles in China, the world’s largest crude importer, sinking to a year low, US stockpiles falling to the lowest since Mar20, and crude prices steepening in backwardation.

Despite all members agreeing it’s time to ramp up production, there are still disagreements within the group on how the process should be carried out. The two heavyweights in OPEC+ are at loggerheads with Russia proposing a direct hike and the Saudis favoring a gradual increase in production. Either way, should the production increase fall within the expected range, the shortfall in supply would ensure that the general market continues to draw down on the excess inventory over the second half of 2021. The preliminary talks were delayed by a day for the members to find a compromise.

USEP JUNVolatility persists in Jun21 on outages and strong demand.

Singapore’s power demand continues to rise as the economy reopens. The average demand for Jun21 is up 1.1% against May21, reaching above 6,500MW, higher than even pre-covid levels for the 3rd month in a row. With the increase in demand, also comes price volatility. While USEP prices did not reach the dramatic levels of $1,000+/mwh last month, the consistent volatility across the month due to unplanned generator outages meant the average price for Jun21 ended up higher than May21.

We are officially past the halfway mark of 2021! That said, I do feel the slow progressive return of pre-Covid civilization. It was only a year ago that I was still huddled at home dreaming of eating out or even just going out for that matter. Year to date, I’d reckon to have eaten at more places than the entirety of last year combined! I have also been on a magnificent cruise! In all honesty, think I should just Ctrl-C Ctrl-V Jan21 to Jun21 for the second half of this year and I’m good for 2021. Anyone with me?

That said, even with my increased household energy consumption these past 1.5 years, my carbon is still very significant. By a quick calculation, I have consumed an estimated 5,500 kgCO2 equivalent over 18 months on just my electricity bills! That value also excludes any carbon footprint generated from transport or gas I use for cooking. Lucky for me, iSwitch provides a whole host of Green energy products that allows me to at least offset my carbon footprint from domestic electricity consumption. If I were ever to get a GCB, I would even take advantage of the Green loan partnered with DBS to install Green solutions such as Solar or Batteries!

 

Zheng Tianbai
Analyst, Oil & Power
Written on 30th June 2021

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