Oil

Markets Outlook
Through Covid and after
August 2020

Vandana Hari
Founder & CEO
 About Us

v Global oil markets macro-analysis – Timely, Credible, Succinct

v Insights through reports, corporate briefings, bespoke research

v Views regularly featured on TV news channels, print media

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 Our Reports: Succinct, Timely and Credible Analysis

OIL VIEWSLETTER CRUDE IN SIGHT BULLS & BEARS EXECUTIVE BRIEFING NOTES
Weekly analysis of global oil Daily Asia morning snapshot Monthly scorecard of bullish Prompt, brief analysis of
market macros of major crude price drivers and bearish factors at play major market events

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 Crude hit historic lows in Apr as global demand tanked

21 Apr 2020:
Brent $19.33
(18-yr low)

20 Apr 2020: WTI -$37.63

(all-time low)

Source: ICE, CME

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 Prices bounced from end-Apr but now stuck in a narrow band

Jan: Wuhan Jun/Jul: Flare-ups

lockdown Feb: Virus hits Inflection in China, Japan,
Europe, Mideast point Jun: Virus Australia,
Mar 6: OPEC+ Vietnam, Hong
accelerates in US
deal collapses Kong, Aug 1: OPEC+
sunbelt states,
May 1: Start of Brazil, India Philippines, Italy tapers cuts
Mid-Mar: Virus Apr: Wuhan OPEC+ cuts
flares up in US lockdown ends

Source: ICE, CME, DME, Vanda Insights

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 Most price support in recent weeks is from weaker USD

Death
cross
Brent has shown an
increasingly strong
negative correlation
with the dollar since
the second half of
June.

Source: ICE

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 Speculative players remain on the sidelines

Source: US Commodity Futures Trading Commission

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 Oversupply may have ended but stocks overhang to remain

• Global oil demand surpassed

supply from June, according to US
Energy Information Administration
• Global oil stocks expected to drain
starting in June
• But 1.3 billion barrels cumulative
rise in stocks through Jan-May
outweighs decline of only 658
million barrels over Jun-Dec

Source: EIA July Short-Term Energy Outlook

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 Global consumption seen trekking higher from May

• Near-unanimity between EIA, OPEC,

IEA over demand nadir in Q2

• Q3 average demand seen almost on

par with Q1 average

• But slow recovery after that,

extending to end-2021

• Full-year 2020 demand seen down

8-9 million b/d on year

• Full-year 2021 demand seen rising

5-7 million b/d on year

Source: EIA, OPEC, IEA July monthly oil market reports

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 US oil rigs, fracturing fleet numbers plunge to historic lows

Source: Baker Hughes (rig count), Primary Vision (fracturing fleet count)

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 US crude output hits 2-year low of 10 mil b/d in May

Source: US Energy Information Administration

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 Longer-term, EIA may be underestimating US output decline

2019: 12.2 mil b/d

2020: 11.6 mil b/d
2021: 11 mil b/d

Source: EIA July Short-Term Energy Outlook

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 Decade-long US shale boom is likely over

• WTI below $50 will deprive US shale

sector of growth

• OPEC+ not in a mood to “subsidise”

US shale growth with its cuts
• Drilling, completion activity has fallen
way below levels needed to even
sustain output
• Shale funding drying up as capital
markets have soured on the sector
Source: EIA

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 Three stages of the 2020 oil market
Crash
Ø Pandemic accelerated
Ø Lockdowns, restrictions imposed
Ø Oil demand collapsed
Ø OPEC+ raised supply
©Vanda Insights
Partial Recovery New normal: Living with the pandemic
Ø 1st wave of pandemic Ø 1st wave continues in parts of the world
subsided in most hard- Ø Pockets of outbreaks across several countries
hit countries Ø Localised containment measures; border restrictions remain
Ø Lockdowns eased Ø Global economy limps back to normalcy but very slowly
Ø Oil demand recovered Ø Oil supply rises slightly, stabilizes
Ø Oil supply tightened
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 The big reset button: 2-3 years of tepid economic growth

• Countries are trying to steer economies out of a recession with fiscal,

monetary stimulus. But progress may be slow in a virus-constrained world.

• A vaccine or cure for Covid-19 will accelerate recovery: But when?

• Chinese economy is at a crossroads. Constrained by debt burden,
overcapacity in infrastructure. Beijing needs new playbook for growth.

• US-China trade war could flare up, creating headwinds for global economy.

• Global oil demand may take up to 2 years to return to 2019 levels.

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 Structural shifts in the oil sector

• Companies reeling from the pandemic’s financial shock are in survival

mode: Cutting costs and dividends, slashing capex and opex.

• Plunge in upstream investment could come back to bite in 5-7 years.

• Oil majors reinventing themselves: A major experiment!

• Shale’s decline will shift oil dominance back to volatile Middle East.

• Lower forever? Persistent low crude prices will present a formidable

challenge to oil export-dependent economies, favourable for importers.
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 Winners and losers
• Short term losers: Oil companies across the value chain, geography and size, from producers to refiners and services
providers will take a hit because of prolonged slump in demand, oil prices, margins.

• Short term winners: Oil storage companies, terminal operators, shipping companies, trading companies that profited
from the “contango play” (was a short-lived phenomenon, may not repeat).

• Short term winners: Oil companies in countries that are able to circulate a Covid vaccine quickly.

• Long term: Losers in the US shale sector, especially the highly leveraged drillers, and services providers; low
complexity/older refiners, mostly in Europe.

• Long term: Winners among oil majors that rationalise portfolios, accelerate pivot to low-carbon energies, continue to
drive costs down and able to raise debt.

• Long term: Good prospects for NOCs with big and fast-growing captive markets, example in China and India, once
economic growth is back on track; companies integrating downstream into petrochemicals.

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 Thank You!

Email: vandana.hari@vandainsights.com
Web: www.vandainsights.com
Twitter: @VandanaHari_SG

©Vanda Insights
 APPENDIX

• WTI’s plunge into negative territory – an anomaly?

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 WTI’s plunge into negative territory – an anomaly?

$/bbl
• Negative prices were caused by:
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- Extremely bearish market sentiment
- Distressed sellers of May WTI contract
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- Lack of available Cushing storage to take delivery
40
- Low trading volumes

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• Repeat likely to be avoided because:
0 - Market sentiment has recovered
- Shift in position rollover behaviour – traders
-20
Settle: -37.63 exited positions in Jun WTI well ahead of expiry
Lowest: -40.32
-40 - Brokers have restricted positions in front month
by retail traders, especially smaller ones
- Largest oil ETF United States Oil Fund (USO) has
been forced to fully exit front-month WTI
Source: CME
futures, spread positions farther down the curve

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