Price movement recap
The violent sell off we have just been through this week and at the end of September is very correlated with the negative ‘narrative’:
- China has loosely mentioned a net carbon neutral target by 2060.
- Joe Biden’s likely victory leading to the ‘imminent return of Iran’ and a 2nd push for renewable energies contributed to push the oil price down.
Looking at 2021, China is planning to double its net import coverage through SPR (strategic petroleum reserves). This positive news is not sufficiently important to push the oil price up but it provides support to maintain price levels. moment.
Futures prices / Cost Curves:
The Gulf Oil market is in contango as shown in the 1st graph below. Due to the Covid-19, supply remains higher than demand which increases the premium (storage+financing).
On the 2nd graph dated 3 weeks ago, the contango situation was similar.
Supply and demand dynamic
As you can see on the graph, OPEC’s crude oil production has decreased significantly as a result of the pandemic. However, there has been a small increase thanks to the return of the largest Libyan field.
Demand declined in the second quarter of 2020 due to Covid-19. Because of confinement, the petrol consumption decreased (cars and planes). At the same period last year, the demand was higher by 0.7 mb/d.
In our opinion, the decrease in demand will continue due to the 2nd virus wave and the new measures to counter the virus spread.
On the positive side, we see that Asian oil demand is coming back, which is expected to be a major catalyst in Q4. Physical markets are strengthening there because Covid-19 is better controlled and an economical takeover is expected.
Recommendations
As shown above, the oil market is in contango. From an investment perspective, we recommend being long for the next 3 to 6 months. We think that due to the pandemic, the demand will remain low, especially during the 2nd wave in which we are currently in. The oversupply increases the storage costs and raise the today’s contractually agreed prices for future deliveries. The unbalance between supply and demand, currently in favor of supply, creates a situation in which investors should be long.
Abbas Al-Azawi
Alexis Baeriswyl
Valery Sikorskiy
References
BOURSE, Zone, [no date]. PÉTROLE BRENT (LONDON BRENT OIL) : Graphique de Cours Comparatif | XBNT | XX00000BRENT | Zone bourse. [online]. [Viewed 28 October 2020]. Available from: https://www.zonebourse.com/cours/matiere-premiere/LONDON-BRENT-OIL-4948/graphiques-comparatif/
Dubai Crude Oil (Platts) Financial Futures Quotes – CME Group, [no date]. [online]. [Viewed 27 October 2020]. Available from: https://www.cmegroup.com/content/cmegroup/en/trading/energy/crude-oil/dubai-crude-oil-calendar-swap-futures.html
Le pétrole récupère au lendemain d’une forte chute, 2020. Allnews [online]. [Viewed 27 October 2020]. Available from: https://www.allnews.ch/content/march%C3%A9s/le-p%C3%A9trole-r%C3%A9cup%C3%A8re-au-lendemain-d%E2%80%99une-forte-chute
London open: Hopes for oil reprieve on reports of China SPR buy-up, [no date]. FXStreet [online]. [Viewed 27 October 2020]. Available from: https://www.fxstreet.com/analysis/london-open-hopes-for-oil-reprieve-on-reports-of-china-spr-buy-up-202004020828
SHEPPARD, David, 2020. Oil traders braced for balancing act in wake of US election. [online]. 27 October 2020. [Viewed 28 October 2020]. Available from: https://www.ft.com/content/00f63355-c1fa-4cf8-ad18-450c12440106
This Week in Petroleum, [no date]. [online]. [Viewed 29 October 2020]. Available from: https://www.eia.gov/petroleum/weekly/
Westbeck Capital Management LPP, 2020. Monthly Newsletter [medium]. London: Westbeck Capital, september 2020.
Organization of the Petroleum Exporting Countries, 2020. OPEC Monthly Oil Market Report [online]. Vienna: OPEC, 13 october 2020. Available from: https://www.opec.org/opec_web/en/publications/338.htm