May Newsletter 2019: Oil Market Review

May Newsletter 2019: Oil Market Review

Brent-crude-oil-may-2019

Brent briefly broke $75 to 6 months high at 75.60 on supply tensions before retreating to below $70 on trade tensions

Wow, what a disappointing month. GOT’s last season averaged 6.5 on IMDB, joining the prestigious ranks of TV series such as ‘The Suite Life of Zack & Cody’, ‘Reba’ and ‘Mighty Morphin Power Rangers’. If you’re thinking ‘Huh?’ right now, it’s okay. I’ve never heard of most of them as well. Speaking of disappointing, Brent prices went on another rollercoaster ride with massive uncertainties in the market. With supply uncertainties counteracting global (really, it’s just US vs China) trade tensions, the market swings like a yo-yo based on the latest market infatuations.

Before we move on to our favourite El Presidente, allow me to back-paddle on my Russian comments from the last couple of months. I’ve been mentioning that Russia has been consistently dragging its feet on oil production cuts since the Dec 2018 OPEC meeting, deftly employing reasons such as ‘Frost impedes oil cut operations in Siberia’ and ‘Cold weather and geological conditions makes it hard to cut production’. Turns out Russia is a team player after all. Buyers of Russian oil have halted imports along the Druzhba pipeline and rejected cargo exports due to chloride contaminated oil. Chloride to refineries is what 2 weeks old sashimi is to my system. Wreaks havoc everywhere, requires specialized team to fix the damage and puts the entire system down for weeks. The rejection of cargoes and pipeline imports took out about 200kbpd worth of production from the global supply chain. Almost overnight, Russia exceeded its crude supply cut goals, albeit in a rather unconventional way. This short-term tightness spiked Brent prices by about $2.00 overnight.

The elation of the bulls was, however, short lived. Trump (Dum Dum Dum) doubled down on trade sanctions against China by imposing a 25% tariff on $200b worth of Chinese goods. He tried to sell this through the classical Trumpianomics where the tariff becomes additional revenue for the people, which got the Keynesians tearing their hair out. Another major move was the ban of Huawei from buying/selling to US technology companies which got everyone googling the same thing: ‘Huawei share price’. Turns out, it’s a private non-listed company but I got to see the rollercoaster price drop anyways through Brent prices.

China then promptly responded by bringing out one of its most effective trade tools from their arsenal: rare earth. China is responsible for the bulk (90% ~ 95%) of rare earth production which is use in almost all electronics. This essentially devolved the conversation into ‘I ban you from using our technology’ against ‘Then I’ll stop you from making the technology that you banned me from using’ while the rest of the market goes ‘WHAT? WAIT! NO! STOP!’. While China has not actually utilised this yet, these hostilities alone led to a $4.00 drop in oil prices as tensions escalates. Harking back to December 2018 where the $5.00 drop wiped out hopes and dreams of many oil bulls and several hedge funds.

Onwards to lighter news. US Department of Energy just renamed liquified natural gas to Freedom Gas as exporting natural gas……promotes freedom? Here’s the quote: “Increasing export capacity from the Freeport LNG project is critical to spreading freedom gas throughout the world by giving America’s allies a diverse and affordable source of clean energy” Mark W. Menezes, the undersecretary of energy. Rick Perry, the secretary of DOE, confirmed the new term. Who would ever dare argue against freedom? Not the first time US has renamed mundane items to ridiculously patriotic names. When the French opposed the invasion of Iraq, the House aptly renamed French Fries and French Toast to Freedom Fries and Freedom Toasts. During World War I, there was even a petition to change sauerkraut to ‘Liberty Cabbage’. Nothing strikes fear into the heart of your enemies more than renaming their favourite lunch.

USEP-price-may-2019

Significantly depressed spot prices in May19 averaging at $93.45

 

May19 spot prices have been surprisingly low with more than half the month coming in below $90. However, this could be due to the distinct lack of outages in this month. I’m keeping an eye are on Jun19 right now to see if prices will be lifted again with several outages planned. The other eye is looking towards the Hyflux plant and who will eventually inherit what used to be the pride and joy of Singapore. Numerous ‘white knights’ have come and gone with what seemed like firm offers that ultimately fell through. Hopefully Utico, a private utility company from the UAE, will prevail against all odds and offer something substantial to the investors of Hyflux.

Zheng Tianbai, Analyst
Written on 30th May 2019

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