May Newsletter 2020: Oil Market Review

May Newsletter 2020: Oil Market Review

May-20 bruet crude
Crude oil prices see gradual recovery on demand optimism.

I have run out of things to order on my delivery apps (not going to mention who because they’re not paying me for it) and have resorted to eating cereal for the sake of novelty for my delicate palate. I had not had cereal since the Great Fasting of Graduation Photos. Thankfully, we are gradually opening up, and more services will be provided soon. This, however, does not mean that we can be complacent. Masks, social distancing, and general responsible behaviour is still a must lest we return to a month ago. The upside is that I can at least get my long-awaited haircut.

Whilst Apr20 had been a horrible month for crude, with WTI trading into negative prices and Brent traded down to pre-2000 levels, May20 largely signals a month of recovery. China’s economy is back to full swing with lockdowns largely lifted across the country. This brings about a recovery in demand for all crude products. Well, all except jet fuel anyways. Wood Mackenzie estimates that China’s appetite for oil will recover to 13mpbd in Q220, up 1.8mbpd from the first 3 months of the year. This is at a 90% level of pre-COVID levels. As for the second-most populous nation in the world, India, fuel demand is expected to recover back to pre-COVID levels by Jun20. Lockdowns are in the progress of being lifted all over the world and crude prices are reflecting the optimism on demand. Crude prices are up 36% since the beginning of May20 and still maintain a healthy contango. Brent prices due for delivery at the end of this year commands a $3 premium over the closest dated contract.

Further adding to the demand story, China has taken advantage of low oil prices and has started to sweep up any additional cheap crude found lying about. Like the proverbial kid with a credit card in a candy store, China’s crude import surges to near-record highs of 11.1mbpd, up 1.3mbpd from Apr20.

Weighing on future demand, however, was the economic impact of Covid-19. In America, the world’s largest economy and one of the worst-hit places by the pandemic, small businesses that were already strapped for cash and large corporations that were fuelled by debt has begun to show signs of insolvency. Estimates suggest that 100,000 small businesses in America has permanently closed due to the Covid-19 already. Even large corporations were not spared. Hertz, which employed close to 40,000 people worldwide has filed for bankruptcy and was amongst the many casualties of the pandemic. Other consumer dependant businesses such as J. Crew, JCPenny, Pier 1, and Virgin Australia are amongst the dozens of high-profile corporations that have filed for bankruptcy protection. In the United States, unemployment has reached epic proportions of almost 20%, second only to the Great Depression of 1933. Having said that, central banks around the world have pulled out all stops to prevent a market collapse like what we saw in 2009 with stimulus in a scale never seen before. If all goes according to plan, we will hopefully be back to business as usual soon enough.

On the supply side, the historic drop in oil prices has been devastating for the US shale complex. 17 small-cap US producers have filed for bankruptcies this year with the industry writing off a combined estimated value of $26 billion in the first 3 months of this year alone. Despite a remarkable recovery in prices, WTI (primary reference point for shale) remains below $40s/bbl and quite a distance from the estimated breakeven of $50/bbl for shale production. If prices remain at current levels, we could see a further wave of bankruptcies, and supply destruction, before the year is done. This would spell trouble for any future investment into shale as confidence in the industry collapses. In such a situation, if there is anyone that can take this in stride, it is going to be Trump. He tweeted “Oil (energy) is back!”, seemingly declaring victory over US crude complex woes while ignoring all the crater-sized caveats. I also, wonder what does all the newly unemployed think about the president’s championing of higher prices at the petrol station. MAGA (for energy)?

One major event to look out for is the return of the OPEC+ meeting at the start of next month. The general consensus is that they will continue to extend production cuts. Now, I happen to know this to a 90% certainty due to one of the 3 following reasons: 1) This is the rational thing to do. 2) I have the power of precognition. In which case I shall pre-watch the next Marvel movie. Or 3) Russia and Saudi Arabia have already agreed to a deal 2 weeks ahead of the meeting. With the 2 largest producers having already agreed on the terms, the upcoming meeting just feels like a formality and re-affirming of obligations. Then again, this is an OPEC+ meeting. This year alone, they have thrown their fair share of curveballs at the market, causing both a historic cratering of prices followed by the current rebound. Who knows, we might have another Mexican stand-off on our hands.

May-20 USEPLow demand persists during May20 but price volatility persists.

As Singapore’s circuit breaker persists into May20, electricity demand remains significantly below seasonal norms. The average demand has dropped close to 400MW from pre-COVID levels with max demand down over 500MW. Consumption profile has also begun to skew more towards off-peak hours as work from home arrangements has become the norm across the island. Despite significantly lower demand, price volatility continues to persist throughout May. It almost seems as if the lower demand is causing the price to be more volatile! Perhaps the rapidly changing demand situation caught some market participants off guard?

That said, I know my electricity usage at home has skyrocketed. Seems my power consumption have increased by almost 50%. However, I will not be able to feel the full impact of the actual usage for another month as my past 2 month’s billing (and possibly the next) was based estimated consumption. Due to Covid-19, actual meter reading has not occurred since Apr20 and will only resume from Jun20 onwards. This meant that I would have quite the adjusted bill to correct for my actual consumption in the coming months. Still, with a cheaper power bill from my current electricity plan, I know that the pinch would not be that bad. Which leads to the question……how should I spent my electricity saving?

 

Zheng Tianbai
Analyst, Oil & Power
Written on 31st May 2020

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