PORTLAND
MARKET
REPORT
May update
Writing this Oil Market Report can be a
difficult task, particularly in those months
where nothing actually of interest happens
on the oil markets. But April 2020 wasn’t one
of those months. In fact, this edition of the
Oil Market Report could have probably been
compiled based on events on any single day
in April – such was the turmoil, volatility and
magnitude of affairs, in a month that perhaps
appropriately starts with knaves and fools
playing fast and loose with the truth…
At the beginning of the month, prices
were already languishing below $30 per
barrel, as the devastating combination of
an OPEC price war and the coronavirus each
took their grip. Having declared on April 1st
that low oil prices were a welcome tax cut for
US consumers, President Trump took a sharp
change of direction 1 day later, when Senators
from Texas, Pennsylvania and Ohio (all key
states in Trump’s re-election bid) reminded the
President that about 1m oil workers were about
to lose their jobs. So Trump did what he does
well, which is announcing “truths” unilaterally
and making them sound very convincing!
AT THE BEGINNING OF
THE MONTH, PRICES
WERE ALREADY
LANGUISHING BELOW
$30 PER BARREL, AS
THE DEVASTATING
COMBINATION OF AN
OPEC PRICE WAR AND
THE CORONAVIRUS EACH
TOOK THEIR GRIP.
“Will be an oil deal between Saudi and
Russia. Production cuts of 15m barrels per
day”, declared Trump on Twitter on the 2nd
April. The fact that no-such deal had been
agreed between Saudi Arabia and Russia
and further, that neither country was (at that
stage) even in talks, was initially of no import,
THIS IS A TIME OF UNPRECEDENTED
EVENTS, SO PERHAPS IT WAS NOT
TOO SURPRISING THAT OPEC AGREED
TO CUT SO MUCH PRODUCTION AND
FOR SO LONG
such is the febrile nature of current oil markets.
In the space of 1 hour, oil prices rose by an
unprecedented $8 per barrel (that’s about 5
pence per litre) and within the space of the
next hour, prices had soon fallen by about $5
per barrel. This, as the market digested the
actual reality of the so-called deal, ie, there was
none…
However, like a good poker player,
President Trump was now banking on the fact
that the continued and vertiginous drops in
the oil price would force OPEC members and
Russia back to the table. Back in February,
a production cut of only 2m barrels per day
(bpd) had caused such disagreement within
OPEC, that a total breakdown of the cartel
had resulted. But now only 2 months later, oil
prices had dropped so quickly that the very
existence of the global oil industry was now
under threat. So it was, that over the Easter
Weekend, OPEC+ oil ministers got together via
Zoom (what else!?) and a 10m bpd production
cut was agreed. Furthermore, there was also
to be a “commitment” from G20 Countries
(spearheaded by the International Energy
Agency) that they would seek to cut their
production by a further 4m bpd.
This is a time of unprecedented events,
so perhaps it was not too surprising that OPEC
agreed to cut so much production and for
so long (basically until 2022, although the
level of cuts do steadily diminish over the 2
year period). All the same, there is a certain
schadenfreude around the fact that having
fallen out so spectacularly over a 2m bpd cut
back in February, OPEC and Russia managed
over a video conference, to accommodate a
production cut five times as large! But that
wasn’t all. It was also unprecedented that
G20 countries were now effectively signing
up to join the world’s largest oil cartel, and
within that, the USA – who only last year were
pushing to have the NOPEC congressional bill
reinstated – were now pushing for “gas”(oline)
prices at the pump to rise. Strange times
indeed…
Yet in the second half of April oil prices
still tanked, culminating in the futures price for
WTI hitting the absurd level of minus $37 per
barrel on 20th April! The first obvious reason
for these continued drops in price was that
the new production cuts did not come into
force until May 1st, meaning that the April
surplus continued throughout the month. In
fact, there was good evidence to suggest that
the situation was exacerbated by oil producers
desperately trying to maximise production
before the quotas hit. Secondly, whilst OPEC
may have the tools to limit production
(because their oil companies are state owned),
the idea that independent commercial
operators within G20 nations could be reined
in overnight was fanciful to say the least.
Business owners and shareholders might have
something to say on that matter!?
YET IN THE SECOND
HALF OF APRIL OIL
PRICES STILL TANKED,
CULMINATING IN THE
FUTURES PRICE FOR WTI
HITTING THE ABSURD
LEVEL OF MINUS $37 PER
BARREL ON 20TH APRIL!
But easily the biggest reason that prices
kept falling in April was because demand for
oil had been so totally and utterly obliterated.
It is estimated that demand for oil in April fell
by a whopping 30m bpd and May is likely to
see a similar reduction. In that light, no level of
production cuts will stop oil prices falling and
only the recovery of demand will put an end to
the price rout. When that will be, is dependent
on when the effects of this awful virus
dissipate, and the world economy can start to
revert to normal.
For more pricing
information, see
page 22
Portland Fuel Price Protection
www.portland-fuel-price-protection.com
Fuel Oil News | May 2020 17