September Newsletter 2019: Oil Market Review

September Newsletter 2019: Oil Market Review

USEP-price-september-2019
Crude prices spike to 3 months high on attack on Saudi’s Abqaiq and Khurais plants

What a month! What a month! What a month! Brent prices rallied 19.5% to $71.95/bbl as a single attack on Saudi’s Abqaiq and Khurais facilities took out 5% of global oil production. This is one of those times where I would just stare at my screen in disbelief while Twitter simultaneously attempts to crash my computer. The silver lining is that the attack occurred on a Saturday so on Monday when the market opens, it would be one of those unicorn-level-rare perfect information moments my economics professor touted so often. Everyone was on the same starting line in terms of where the oil market is going (UP! UP! And UP!) and for once, it came down to only the fastest fingers and wifi signal.

This is the largest single-day percentage gain in prices since Iraq invaded Kuwait in 1990 and as details were still murky as the market was still in shock on Saturday. Along with the uncertainty, came conspiracy theories on what happened. Initially came reports on drone attacks. When people realized that the type of drones that the Houthis could afford did not match the damage done on the facilities, the theory became drones carrying cruise missiles attacked the facilities. Then when people realized that a typical cruise missile is about double the length of a drone, the theory became drones with cruise missile warheads attacked the facilities. All the while I was sitting behind my desk thinking “WHAT IS GOING ON!?!?!?”. Of course, I wasn’t much better when it comes to conspiracy theories. I floated the idea that given the Saudis have been trying to boost oil prices since last year, this could just be a giant gimmick to give a temporary boost to oil prices which they can then laugh about over their Dom P. champagne and brand new superyachts (I was wrong).

There is another significance to this attack that would reverberate for eons to come. Saudi Arabia is seen as the linchpin, global leader in the crude industry with about 10 mbpd of production. It has long reputed as a guardian of the oil market and at many times serves to offset any regional production uncertainty. This crippling attack has damaged that reputation. This level of revelation is somewhat akin to the day that a child realizes Santa isn’t real or that Daddy and Mommy aren’t omnipotent or that your economics professors saying perfect information exists in the market. But hey! We all have to grow up someday.

Saudis reassured the global markets that this attack would cause only a temporary blip in their production and full production would resume by the end of the month. However, skeptics in the market suspect that damage might be more severe than initially claimed. This led to varying degrees of panic among nations as they scramble to review their strategic reserves. The US has the largest buffer at over 600 days and India being the tightest with less than 10 days of cover. China has about 80 days of reserves.

Somewhat true to their word, Abqaiq and Khurais facilities recovered about 50% of their production within the week which boosted confidence in a speedy production recovery by the end of the year. To further allay any fears of supply shortage, Trump has generously offered to release oil from the Strategic Petroleum Reserve to keep the market well supplied. A very shrewd move that temporarily replaces Saudi’s position as the global crude guardian. With all this bearish news, the week closed at $64.28/bbl, $7.67 lower than the week’s high of $71.95/bbl.

Here’s a quick recap of all the other things this month that weren’t attack on Saudi Arabia. Fuel oil cracks continues to rally for contracts before 1st Jan 2020 as buyers rushes to buy before the IMO2020 deadline where production would most likely decrease substantially. After months of depressed oil prices, US’s shale production has begun to fall with number of active rigs down to 2 months low. The spike in crude prices may prove only to be a temporary saving grace for shale firms as investors pull out of the shale market to seek better returns elsewhere.

USEP-price-september-2019
Volatility in the spot market continues with planned outages taking supply out of market

USEP spot price volatility continues as multiple generators are out for scheduled maintenance this month. With that in mind, the outcome is surprisingly mild with only 7 days of USEP prices coming in above $100. Prices are also higher this month as we endure the haze and a prolonged dry spell. There were days where I could barely see a green patch along the pavements. There was a literal cheer in the office when it started raining. Yes, a single cheer. By a single person. Me. Apparently, in an office of over 80 people, I was the only one excited about water falling from the sky. I’d shudder to think of the electric bill I’ll receive this month. Urgh…….

As iSwitch nears its 100,000th customer, we would be celebrating this milestone in conjunction with……. MOVING DAY! iSwitch and its holding company will be moving our office to Robinson Road next month. Before the move, HR was going around the office asking if we wanted anything for the new place. I suggested a beer tap, whiskey tap, vodka tap or at least a wine cabinet. I’ve just been assured by HR that none of my suggestions were accepted and was pointed to the nearest bar. Then again, it’ll be a bigger, better office with more food options around. Whoohoo! Silver linings!

Zheng Tianbai
Analyst, Oil & Power
Written on 27th September 2019

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