Crude rallies to 7-months high on vaccine optimism and conclusion of the US elections.
Phew! Something good finally came out of 2020! After almost 1 year of isolation, bland cereal eating, attempting Youtube workout videos, and a general chronic healthy lifestyle, we finally have some positive news. A viable vaccine is close and with that, the likelihood of being able to travel by 2021 has drastically increased! Finally, time to spend some of that involuntarily accumulated travel budget.
The oil markets ended Oct20 on an extremely bearish note with the election uncertainty and a second wave (or a continuation of the first, depending on the literature) of Covid19 ravaging across the US and Europe. With multiple US states and major European countries returning into lockdown, it will most definitely hamper any hard-gained demand recovery over the past few months. Germany, the largest European economy, went on an even harsher lockdown than before after cases and deaths spiked to highs not seen since the start of the pandemic. Most other advanced European nations has since followed suit and imposed lockdowns, with the remainder electing to at least impose curfews. Most US states have also tightened restrictions via various restrictions in social gathering and dining although the fervour from the elections and protests have over-shadowed any Covid19 worries. Prompt month Brent prices plunged to a 6-months low of $35.74/bbl on the bleak news as oil demand expectations plunge further beyond the cyclical winter demand rout.
All that was just Oct20! Nov20 came with a starkly different tone. As with any storm, there is bound to be a silver lining somewhere. In this case, the lining came in the form of a huge shiny spotlight as multiple pharmaceutical companies announced successful vaccine trials. While even the most optimistic estimation puts mass vaccine distribution by the end of Q121, the oil market, including the prompt month delivery contracts, enjoyed a month-long surge in prices. Which perplexed me to no end as demand structure likely would not change or even worsen till we are well into 2021. Ahhh……optimism……how I have missed you. The front-loaded optimism pushed a uniform contango oil curve into a curve that showed backwardation from Q221 to Q421. i.e. Brent crude that is deliverable in Apr21 is at a premium to Brent crude deliverable in Dec21. This is a far cry from early this year where the Apr21 contract was priced at a $3+ discount to the Dec21 contract.
On the supply side, Libya’s production came back in force after the ceasefire in Oct20. Crude production surged to nearly 1.25mbpd from about 0.25mbpd in Oct20, closing in on their pre-civil war production levels of 1.6mbpd. However, further increases would be difficult as years of conflicts have left much of the country’s oil infrastructure in neglect and disrepair. Libya’s NOC estimates that the repair works on the oil wells alone could cost more than US$100 million. Nevertheless, the surge in supply surprised almost all market participants, none more so than their fellow OPEC members who now must take into account the additional flood of crude during their next production quota discussions. Libya has been given an exemption from production cut at prior meetings so it remains to be seen if they’ll now be required to chip in given the recovery. Then again, the ceasefire has been tenuous to say the least, and largely at the whim of General Khalifa of the Libyan National Army. Given the lack of clear political leadership or stability within the country, OPEC typically gives members suffering from conflict several years of recovery buffer before imposing production quotas.
USEP volatility returns in Nov20 on unexpected generator outages.
Turning back home towards the Singapore power market, after a calm Oct20 despite higher demand, Nov20 started off with a bang and ended off with a KABOOSH! Warm weather coupled with multiple planned and unplanned outages spiked USEP up to $1,254/MWh, a level not seen since Feb19. After an entire week of volatility and $200+/MWh daily averages, Nov20 is now the 3rd highest priced month relative to fuel costs in the last 5 years! With a large portion of people working from home, we highly recommend that everyone continue to lock in their electricity rates to prevent bill shock from spot market events such as this.
WE HAVE (almost) SURVIVED THE YEAR! As 2020 (almost) draws to a close, I reflect on the past (almost) 1 year and think about how ridiculous the journey has been. A global pandemic, a global lockdown, oil prices going negative and spot electricity market explosion. Nevertheless, I have made it through with a relatively healthier diet and a fitter body. For my friends that disagree with my statement……. I disagree with you. I will be spending the remainder of the year clearing my leave balance. Totally look forward to spending time on my balcony with a beer and imagining myself (almost) on the beaches in Bali.
Analyst, Oil & Power
Written on 30th Nov 2020