Bulletin 1: NORTH AMERICAN CRUDE PRICE HISTORY AND COVID-19 IMPACT

Price movement recap

2014-2016 economic slow-down, and massive oversupply of oil by NON-OPEC countries essentially due to rising shale oil production by the US, combined with economic slow-down reducing demand for oil. Causing decrease in WTI spot price from USD105/barrel to USD36/barrel. [1]

2020 Coronavirus recession: economic slow-down reducing transport, air-traffic, affecting directly the global demand for oil which caused the price to fall drastically and for the first time, WTI trading to negative USD37/barrel. Agreement from OPEC+ to cut output by 10M barrels/day, allowed a recovery to come back positive and more or less stabilizing the price oil. [2]

Forward curve 9.11.20

In this case the forward curve is in contango which means the spot price for delivery now is lower than today’s price for delivery in future. In other words, it means our market is relatively well supplied. Supply is greater than demand now, 

In other words, today’s future contract prices for delivery today is lower than prices for delivery in future.This can be explained by the fact that today’s prices for future delivery include: Storage and finance cost.  

The contango situation could be explained by the recent cut in oil production from OPEC+ and also the short recovery of the economy by the expected announcement of a potential vaccine. [2]

Supply and demand dynamic – Inventory levels [3]

• Oil changed due to its fundamentals[3]

• 30th October: Oil rigs increase by 10 in the US. It’s used to happen when the market is doing well. OPEC increased its supply by releasing its weekly production per member[3]

• 3rd November: American Petroleum Institute announced for Inventory level a large drawdown of 8millions barrels. This lack in supply makes price increase[3]

• 4th November: Energy Information Administration’s weekly crude oil inventory announced another drawdown of 8milions barrels. [3]

• Election in the US affect the oil market because of different points of view between Trump and Biden. Trump supports the current oil production and Joe Biden wants to invest USD2 trillion in green energy which doesn’t help the oil market. Politics and coronavirus created uncertainty because people don’t know if there’ll have a vaccine or lockdown. [3]

Recommendations:

On Monday, oil prices increased after the announcement of a vaccine effective at more than 90% against the coronavirus by Pfizer. With markets looking forward to the potential end of the pandemic sometime next year, optimism returned in a big way. We can already see that crude oil had its best day in months, rising more than 10%. The growth has contributed to significant increases in the share prices of many oil companies. [5]

Even though, compared to early November where the price was at $37.14 and now raising to $42.59 per barrel (price today for delivery in december) the recommendation is to be long (buy) for the next 3-6 months. Since with the announcement of the vaccine the future consumption of oil will tend to rise and the market being well supplied will be contango and therefore meaning that the price will be higher month after month in a year’s time to reach maybe the prices of last year. (Nov 2019 $57.03 and Jan 2019 $63.12). [5]

References:

[1] David Wethe., [27.12.19]. The Shale Revolution – Bloomberg. In: [online].  Available at: https://www.bloomberg.com/quicktake/fracking.

[2] Sehr Nawaz., [29.05.2020]. Making History: Coronavirus and Negative Oil Prices | Global Risk Insights. In : [online]. Available at : https://globalriskinsights.com/2020/05/making-history-coronavirus-and-negative-oil-prices/.

[3] Irina Slav., [04.11.20]. Oil Prices Jump On Large Crude Inventory Draw | OilPrice.com. In : [online]. Available at: https://oilprice.com/Energy/Energy-General/Oil-Prices-Jump-On-Large-Crude-Inventory-Draw.html.

[4] Reuters Staff., [03.07.08]. FACTBOX: Why oil prices hit a record high above $145 | Reuters. In : [online]. Available at : https://www.reuters.com/article/us-oil-prices-idUSL0322022020080703

[5] Josh Owens., [10.11.20]. Oil Optimism Returns On Fresh Vaccine News | OilPrice.com. In : [online]. . Available at : https://oilprice.com/Energy/Energy-General/Oil-Optimism-Returns-On-Fresh-Vaccine-News.html.