A Christmas Card from a Hooker in Minneapolis

OPEC will have its minsters’ online meeting today at which a decision will be taken on how much oil to produce. There is much to consider after yesterdays’ technical meeting when most delegates came out against an increase in production beyond the 2.6 Mn bpd increase spread over 2021 that was agreed in December. The ministers have much to consider:

Firstly, oil prices have recovered from their crash last March with Brent standing at over USD 52 per barrel at the time of writing. That isn’t enough for Saudi Arabia to break even on a national budget basis but it’s profitable for Saudi Aramco. It’s also enough for Russia’s producers to show an operating profit. Brent futures prices today rose to USD 53.33, their highest since before last March’s crash, while WTI futures followed suit to be USD 49.83 a barrel. Traders seem to be betting on no extra oil entering the market in the next quarter.

Second, the low oil price has devastated the US shale industry, the intended target of the Saudi ‘oil bomb’ last year. Dozens of Eagle Ford and Permian Basin oil and gas producers have gone bust or into Chapter 11 restructuring, with over USD 50 Bn of debt now in abeyance. Shale production has fallen by 1.53 Mn bpd in Dec-20 from 9.11 Mn bpd in Dec-19 to 7.58 Mn bpd in Dec-20. Only two of the restructured producers – Chesapeake and Extraction – have been spudding new wells in any numbers. The Baker Hughes Drill Count stood at 351 on 30th December, up three rigs week on week but down 445 year on year. If Saudi Arabia wants to kick a man while he’s down, it may want to pressurise prices downwards for a bit longer yet, especially as its global stock market investments will be doing nicely at the moment, refilling the treasury.

Third, Coronavirus-related demand disruption will remain until a vaccine is rolled out to a significant proportion of the economically active (or previously economically active) population, i.e. the global workforce aged around 16-65 years. And while the world’s arms await the magic needle, the mutating virus has become more infectious, forcing governments into tighter social controls. The upshot is that global oil demand is unlikely to rise and may even fall in Q1 this year.

Fourth, global oil demand may fall but Asian oil demand may rise. Opec’s main customers are now in the Pacific, not the Atlantic. China, India, South Korea and Japan are the world’s leading importers of crude oil. Those countries’ public health systems have stood up better to Covid-19 than the US or Europe. As recent positive industrial production indices suggest, their economies will probably recover sooner, driving demand for crude oil from Opec and Russia. But even in Asia there are concerns about the current growth of Covid-19 infection. This week South Korea has banned private gatherings of more than four people. Japan is considering declaring a State of Emergency for the Greater Tokyo metropolitan area as Covid-19 cases rise rapidly.

Fifth, the uncertainty around short term oil prices is extremely high, reducing the volume of physical trades, with Asian gasoil prices falling into contango as traders bet on short-term pain before the vaccines are distributed. As refined products prices go into contango, refinery margins are falling Gasoil cracks in Singapore are nearly 60 per cent lower than their five year average at around USD 6.75 per barrel. Rotterdam diesel barge margins are around USD 6.00 per barrel, their lowest for ten years.

Moreover, weak European demand won’t necessarily divert cargoes to Asia if demand there is also stuttering – the North West Europe – South East Asia gasoil arbitrage is around USD -7.8, disincentivising shipments which usually only work at a differential of around USD -15 depending on freight rates.

Sixth, Joe Biden moves into the White House later this month (let’s discount other less plausible scenarios). His very presence along with his Climate Plan may move markets, but early policy changes are probably already priced in. Still, waiting to see what he does is a better option than supposing what he might do.

Opec ministers may decide that gently rising prices even as demand growth stutters represent a situation to be tolerated. Their best bet may be to do nothing until clearer signals emerge later in the year. For the average oil tanker operator in the street, this probably means more thin gruel. Don’t expect a step change up in Mid East cargoes to drive a spike before Lunar New Year.

In fact, don’t expect to expect anything much until after Lunar New Year this year. The Year of the Ox begins on 12 Feb. Perhaps, as Tom Waits sang in his ‘Christmas Card from a Hooker in Minneapolis’ the tanker market will be ‘eligible for parole come Valentine’s Day.’