Oil prices weaken as stalled vaccination efforts dampens oil demand outlook.
Seems Mar21 is the month of expensive mishaps. From the Suez Canal blockage to Archegos implosion, it has been a very costly month for many people. Bill Hwang managed to rack up a record US$20 billion of personal loss over just 2 days, highlighting the importance of risk management of any portfolio and the staggering MOC (Mugs of Coffee) equivalent he has lost.
The highlight of the month was the Suez Canal blockage. On the 23rd Mar 2021, a container ship Ever Given chartered by Evergreen was blown off its course while passing through the Suez Canal. It ended up being wedged across the canal, blocking off traffic to one of the busiest trade routes in the world that accounts for approximately 12% of global trade. More than 300 ships on either side of the canal were blocked off with some electing to reroute their way across the African continent via Cape of Good Hope rather than stay idle and await an uncertain dislodge date. The ship was finally freed after 6 days with the combined efforts of ships from 3 separate nations. The 6 short days are estimated to disrupt US$9 billion worth of goods per day and costing Egypt, which operates and receives revenue from the use of the canal, about US$12~14 million in lost revenue each day. I am pretty sure is the most expensive traffic jam in history. That said, I have done zero research on the historical cost of jams (the traffic kind, not berries) so please do not quote me on this.
The blockage caused an immediate reaction in the oil markets as about 13 million barrels of crude oil were delayed from their destinations. Brent prices ended 24th Mar almost 6% higher due to the uncertainty on how long the blockage would last. WTI, the American crude benchmark, rallied more than 4% on the day as well. The ship’s operator is currently being sued by almost everyone under the sun for a sum that I am certain is just as staggering.
Additional support for prices this month came in the form of a surprise OPEC+ decision to largely maintain production cuts for Apr21 despite Brent prices has now rallied above even pre-COVID times. The market largely expected them to reverse some of the cuts made last year up to 1.0 to 1.5mbpd. Russia has indicated its want to push for more production, taking advantage of the strong crude rally on COVID vaccine optimism, and got a concession to increase production by 130kbpd for Apr21. The continued conservative production targets rallied a market that was expecting extra supply. Both Brent and WTI benchmarks jumped more than 4% on the announcement.
Despite all the price optimism, the shadow of COVID still lurks in the background. Europe is now experiencing the third wave with the number of cases gradually on the rise as governments tested waters with a gradual opening of the economy and the general populace shows signs of “pandemic fatigue”. Cases and deaths in Central Europe are now amongst the highest in the world with over 20,000 people losing their lives per week. Many European nations have since reintroduced lockdown measures with Germany extending their current restrictions past mid-April, France imposing curfews, and Italy shutting down schools and economic activities again. All these would put a dampener on the continent’s fuel demand recovery. The near-term outlook is further impacted by a slow rollout of vaccines and suspension of the AstraZeneca vaccine in some countries over safety concerns.
Mar21 experiences USEP volatility on strong demand recovery and outages
Energy demand recovery continues from Feb21 as economic activity and warm weather support electricity consumption in Mar21. Average demand came at more than 200MW above Feb21 to 18 months high at about 6,200MW. Max demand peaked above 7,200MW, a level not seen since Sep19. Strong demand at the start of the month coupled with generation unit outages resulted in the first week of Mar21 experiencing strong USEP volatility. USEP spiked up to $430.56/MWh and the month averaged in at $103.35/MWh, more than $10/MWh above Feb21 prices.
I have recently found a great, and more importantly, free method of traveling from the comfort of your couch. That is to drop Pegman (the little yellow dude you drop on Google Maps for street view) into random locations around the world. In the span of an hour, I have travelled to Maui, Madagascar, Iceland, France, Kazakhstan and enjoyed the wonderful scenery and culture they have to offer. All the while internally sobbing over a bowl of cereal while thinking of traveling overseas. The upside is, I have finally decided to bite the bullet (in this case, my bank balance) and decided to book one of those cruises to nowhere. I guess this would technically count as my “overseas” trip of the year?
Analyst, Oil & Power
Written on 31st Mar 2021