https://www.ft.com/content/fa6f09c1-a86a-4ace-ad0b-cccd670d8bb3
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Biden’s election & Vaccine expectation – Gulf oil – Weekly bulletin #2
Price movement recap
During the last 3 weeks, the oil price had first declined due to the lockdown announcements and political election uncertainties. Afterwards the oil price rebounded thanks to the Biden’s election (production in the US is expected to decrease + no more uncertainties on this election). Biden’s diplomacy is also a positive factor compared to Trump’s unpredictability. The optimistic outlook of 90% effective vaccines from Pfizer and 94.5% effective vaccines from Moderna allowe the market to rise, especially in the transport and energy (oil) sectors.
Futures prices / Cost Curves:
The Gulf Oil market is still in contango. Indeed, because of the Covid-19, supply remains higher than demand. However, if the vaccine developed by Pfizer and Biontech proves to be effective, we expect the price curve to flatten slightly in the coming months but still in contango. According to IEA (International Energy Agency), the Covid-19 vaccine is unlikely to raise oil prices until the end of 2021. A weaker demand outlook combined with rising supply is putting pressure on global producers to hold back output in order to support prices.
As explained above, the forecast for demand in the coming years is lower than it was at the beginning of the year. As shown in the chart below, this will necessarily impact the level of prices downward (supply > demand). We have used the Brent forward curve as there is not enough data on Dubai Crude. However, as the correlation between the different types of oil is very high, the scenario will be very similar for Gulf Oil.
Supply and demand dynamic
As we can see on graph 4, oil demand in the Middle East has not changed in the last 3 weeks. However, OPEC expects a decrease in demand for the end of 2020 and in 2021. Therefore, they will change their production plan as of January 2021. These changes are still due to Covid-19 and will last until mid-2021. Finally, we expect an upturn in demand thanks to optimistic forecasts of the Indian and Chinese economies.
Regarding the production, as shown in graph 5, it has slightly increased in September but is still very low compared to the same period in 2019. Finally, between the 30th November and 1st December OPEC members will meet the non-OPEC allies to discuss the production policy. The results of this meeting will also have an impact on price levels.
Recommendations
The market is still in contango and, from our point of view, will remain so for a long time. From an investment perspective, we still recommend to be long for the next 3 to 6 months. If the Covid-19 vaccine proves effective, this could have a significant impact on price level in the medium term with as the demand would pick up again, particularly in the field of transport and energy. Furthermore, we believe that the current price does not reflect the potential for recovery in the transport sector otherwise the price would have been higher.
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, 11 november 2020. Available from: https://www.opec.org/opec_web/en/publications/338.htm
ASHRAF, Muqsit, 2020. Big Oil must make seismic changes to survive. [online]. 9 November 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/2596d26c-76a6-46e6-9493-b2490b28fb24
ASHWORTH, Louis, 2020. Oil hits $45 and markets climb on vaccine hopes. The Telegraph [online]. 11 November 2020. [Viewed 17 November 2020]. Available from: https://www.telegraph.co.uk/business/2020/11/11/markets-live-latest-coronavirus-news-pound-euro-ftse-100/
Covid vaccine breakthrough fuels broad global equity rally, 2020. [online]. [Viewed 15 November 2020]. Available from: https://www.ft.com/content/48400214-6caf-4d88-b145-75a3cead2b23
L’Opep risque de regretter son “ami” Trump, craint l’ère Biden, [no date]. Investing.com France [online]. [Viewed 13 November 2020]. Available from: https://fr.investing.com/news/commodities-news/lopep-risque-de-regretter-son-ami-trump-craint-lere-biden-1986755
MEREDITH, Sam, 2020. OPEC cuts 2020 oil demand forecast again on rising Covid cases — sees slower recovery next year. CNBC [online]. 11 November 2020. [Viewed 14 November 2020]. Available from: https://www.cnbc.com/2020/11/11/oil-opec-cuts-2020-demand-forecast-again-on-rising-covid-cases.html
MILLER, Joe, MANCINI, Donato Paolo and KUCHLER, Hannah, 2020. BioNTech and Pfizer raise hopes with breakthrough Covid-19 vaccine. [online]. 9 November 2020. [Viewed 15 November 2020]. Available from: https://www.ft.com/content/497594f4-7771-4af5-98dc-8c98487ea212
Moderna: Covid vaccine shows nearly 95% protection, 2020. BBC News [online]. [Viewed 16 November 2020]. Available from: https://www.bbc.com/news/health-54902908
Oil market has not priced in prospect of a Biden victory | Financial Times, [no date]. [online]. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/0d6d0fbf-93b5-4f01-a6c8-f2d8ca95dc4a
RAVAL, Anjli, 2020a. IEA says coronavirus vaccine unlikely to boost oil market until late 2021. [online]. 12 November 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/eedf958c-c425-4a1b-bc90-6e213f7b8ba4
RAVAL, Anjli, 2020b. Opec slashes oil demand outlook on Covid restrictions. [online]. 11 November 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/ff79bf26-bc3f-4a83-be74-638b3123fc74
SHEPPARD, David, 2020a. Oil producers have more than a pandemic to worry about. [online]. 11 November 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/e1b7bab4-b962-4fab-ae7f-10da597b1cf6
SHEPPARD, David, 2020b. Oil sinks to lowest since May on fears new Covid rules will hit demand. [online]. 29 October 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/1b5f207b-d849-47ee-94be-3f8153c67719
SHEPPARD, David, 2020c. Oil traders tear up demand forecasts as Covid lockdowns return. [online]. 31 October 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/75ff69c2-e83f-4c18-9451-598b6f17edd8
WTI USD | Cours du pétrole brut WTI Dollar américain | Cours Cours du pétrole brut WTI Dollar américain, [no date]. Investing.com France [online]. [Viewed 17 November 2020]. Available from: https://fr.investing.com/currencies/wti-usd
Organization of the Petroleum Exporting Countries, 2020. OPEC Monthly Oil Market Report [online]. Vienna: OPEC, 11 november 2020. Available from: https://www.opec.org/opec_web/en/publications/338.htm
Bulletin #1 – Is the covid-19 really having an effect on the wheat market ?
By Lyticia Wouguia, Christopher Delfin and Piratharsan Poologanathan
Price movement recap
The graph above represents wheat prices of the year 2020. To begin with, due to the outbreak of COVID-19, some major commodities have been highly affected. However, wheat has seen minimal direct impact from this pandemic. This is because wheat has a relatively stable demand and is considered one of the most inelastic commodities. But, by looking at the first part of the pandemic outbreak (Feb-April), prices are dropping continuously due to disruptions in demand from the worldwide lockdown. Meaning also that there are less exports and less production happening. Then, there is a peak by mid-March which is due to new harvests from farmers. Furthermore, coming at the end of the year, prices are rising as there is a continued reduction in production in the EU and the Black Sea due to scorching weather and this is a big risk for tighter supplies in those nations that dominate the international export market.
Supply & demand
By reaching the end of the year, USDA forecast world wheat production at 768.48 MT in 2020-21. A difference of 4.17 MT from 764.32 MT in 2019-20 which is the current record. Overall, the EU, Ukraine and the United States will be producing and export less as they will be facing unfavorable weather conditions. Meanwhile, Argentina, Australia and Canada and some Asian Countries will have better performances as exporters.
In addition, due to the second wave of the virus, countries are focusing more on domestic consumption rather than foreign trade, which also increases their own wheat stocks. As seen below, world ending stocks is at 321MT and half of these stocks is held by China, around 163MT. Regarding the influence of the Covid-19 pandemic and the panic buying of long-term storage food products, such as pasta, has not greatly affected the demand curve worldwide. It has only affected local demand at small fluctuation.
Here below is a graph:
Global ending stock has a major effect on the supply. As you can see on the graph below, the ending stock is increasing each year. This increase is explained by the fact that China and India have increased their stock due to the government’s encouragement through subsidiaries. However, as we can see on the graph the price tends to increase, because China and India do not export wheat.
Chicago SRW Wheat Futures Quotes
The Chicago soft red wheat, which is the largest wheat derivative, the futures are above the spot price. We can observe that today the market is not supposed to lack in production, and it will stick to the growing demand.
Recommendations
Due to the seasonality that the wheat market depends on, the price varies a lot on the harvest period or. Actually, we are facing here, a normal curve from December to March, and then the price stays stable till May and finally decrease. This cycle seems to repeat itself on year 2021 and 2022. In an investment perspective for the next 3 months, it is in the best interest to store.
Sources
Oil market uncertainties: Covid-19, the American elections and the Asian economy – Gulf oil – Weekly bulletin #1
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
Market Overview – Gulf Oil
Market Overview – N.A. Oil – S1.2020
Market Overview – N.A. Oil – S1.2020
