November Newsletter 2019: Oil Market Review

November Newsletter 2019: Oil Market Review

Crude prices remain volatile after September attacks due to on/off global trade tensions.

It’s good to be back after a long holiday. I was finally urged by HR to clear my leave balance for the year. Evidently, work-life balance is an actual thing now. So yes, the reason why there is no October newsletter is not that the energy complex was boring last month, it’s because of the sandy Bali beaches and cheap beer.

September attacks on the Saudi’s Abqaiq–Khurais facilities saw the largest rally in oil in recent history as it took out about 5% of the world’s oil production. Prices rallied 19.5% on fears of a prolonged supply crunch as no one really knew when the facilities will be back online and more importantly, a drastic escalation of conflicts in the Middle East. However, much like my new year resolutions, the situation didn’t last very long. Production of the facilities recovered by 50% within a week and close to a full recovery by the end of the month. The US volunteered its strategic reserve to stabilize market supply and committed 3,000 additional troops to the Saudis. By the start of October, prices have already dropped to below even pre-attack levels.

As memories of the attack start to fade, trade tensions between the US and China re-emerged as the top concern of traders. For months now, the first phase of the deal has been stuck in the “almost done” purgatory. The first phase comprises of China agreeing to buy up to $50 billion worth of American farm products and greater access to the Chinese financial markets. In exchange, the deadline of $250 billion tariffs on Chinese goods that starts mid-October would be postponed.

That was last month. Since then, the Trump administration has been applying with Schrödinger’s theory of cats onto trade negotiations where the first phase of the trade deal is both almost done and far from done at the same time. No one really knows until it is signed. Or not signed. In the meantime, the market hangs onto every non-impeachment related tweet that Trump sends out as he flips and flops between almost done deals and punishing China for unfair trade practices. China has been relatively quiet on the progress of the talks. Although we are starting to see some form of concessions in terms of strengthening up IP laws. Honestly, I am so jaded by the talks that I don’t really care anymore. Or do I? Hmmm……

On the supply side, political instability begins to chip away the market’s confidence of the production capabilities across multiple nations. While it might not escalate to the scale of the Arab Spring in the 2010s, the widespread protests and strikes among several of the oil-producing nations do cause concern. Iraq’s protests have already seen hundreds dead and tens of thousands injured in a short span of 2 months. Protests have already impacted operations at oil fields, refineries, and ports. Right next door in Iran, tens of thousands came out in protest against the government. Hundreds of civilian casualties along with damaged government buildings. Internet access got shut in an attempt to control information flow. Libya is still embroiled in a civil war with no clear end in sight. Venezuela is still tumbling down the hyperinflation whirlpool where inflation is estimated to be 200,000% this year and 500,000% next year. Crumbling infrastructure and sanctions essentially crippled the national oil industry and the government has very little political will or ability to correct the problem.

US shale hits another production high at more than 9 mbpd with production next year forecasted to top more than 10 mbpd. This, however, comes with a backdrop of investors pulling out of the volatile industry. Prolonged periods of low oil prices and high costs have alienated investors after years of lacklustre returns and increasing default rates. Close to 40 shale firms have declared bankruptcy this year, bringing the total number of Chapter 11 filings to 200 in less than 5 years with $110b defaulted. This will only acerbate as banks start to tighten credit lines or force firms to put up more collaterals to cover the risks.

USEP spot prices remain volatile due to multiple unplanned outages

Oct19 saw a return of volatility back to the market when an unplanned generation outage brought USEP up to $600/MWh. So while low oil prices, and some of the lowest demand days in recent history helped to taper prices in most periods, volatility pushed the average price back up to $94.39/MWh.

Nov19 is looking to be very similar to Oct19 as prices swings wildly between the calm days and days when volatility takes hold. With 2 instances of USEP breaching $500/MWh so far, the month is looking to be rather pricy again.  Seems like the Singapore power market is going to end off the year on a spicy note.

On to news closer to home, iSwitch has just moved into our new office along Robinson road! Loving the new location, especially the extensive cheap food options around, if only the queues here are shorter. Whoever said time is money was on to something. The new office also came with many new toys. We now have a fancy new coffee machine, a darts board, and even an arcade machine! Sadly, HR was apparently serious when they flatly rejected my suggestions of a beer tap, whiskey tap, vodka tap or at least a wine cabinet. We also have just installed a state-of-the-art smart meter through which we can control the various appliances in the office, it also helps us monitor our electricity consumption across the day. Now, I can finally prove to everyone else that our electricity bill is not due to me leaving the aircon on overnight!

Meanwhile, the iSwitch office is in full swing in preparation for our Christmas party. We’re doing a Secret Santa this year and each of us gets to make a (reasonably priced) wish list. I just want to take the opportunity here to say to my Secret Santa: I have no idea where to buy your gift.

 

Zheng Tianbai
Analyst, Oil & Power
Written on 25th November 2019

Keep in touch and join our mailing list to receive our monthly newsletter!