April Quarterly Report, Geopolitics

Attacks Targeting Saudi Arabian Oil

Last year, Libya was able to increase its oil production significantly after a blockade on oil exports was lifted. This year it might be Iran’s turn. Back in 2018, Iran produced as much oil as 3.83 mbpd, but when former U.S. President Trump pulled out of the Iran nuclear deal, production gradually fell, and in 2020 it was below 2 mbpd.
Now that the U.S. has a new president, Iran has been increasing its production slightly in anticipation of the sanctions relief that would happen if the Biden administration returned to the nuclear deal. However, the negotiations between the two countries seem to be in a stalemate at the moment. Biden has said that he will only return to the 2015 deal if Iran first resumes compliance with the pact by limiting its nuclear operations. Iran, on the other hand, says it will resume full compliance with the pact after U.S. sanctions are lifted.
If the two nations can find a solution and return to the nuclear deal, it might have a significant effect on the oil market. Nearly 2 mbpd of supply could be returning to the market.

Iranian Oil Returning to the Market?

Financials

The main headline within financials continues to be the governments and central banks attempt to support the economy following the large downturn in economic activity caused by covid-19.

USA

The U.S. economy continued to recover from the massive blow in 2020 although still not on pre-pandemic levels. From the graphs below, it can be observed that GDP growth and manufacturing PMI have improved in the latest quarters. However, GDP growth YoY continued to be negative in Q4 of 2020 at -2.4%. Manufacturing PMI saw an increase to 60.8 in February from 58.7 in January also surpassing the level of 60.7 from December 2020. Furthermore, the unemployment rate has continued to drop in the latest months to a level of 6.2% as of early March.

On March 11, President Biden signed the 1.9 trillion dollars stimulus bill American Rescue Plan Act after it has been passed in both the House and Senate. The bill includes stimulus checks of up to $1,400 per person dependent on income levels. Among other things, the bill also includes unemployment benefits, child tax credits, funding for schools and businesses as well as money for covid-19 testing and the vaccine program which will help to prevent the spread of covid-19, the main factor for the outlook of the economy. With this stimulus bill, the U.S. government aims to increase spending and employment. Analysts estimate that the stimulus bill could boost the U.S. economy by 2 percentage points over the next two years.

Following their meeting in March, the Fed announced that it will continue to use all its tools to support the U.S. economy. Although indicators of economic activity have turned up, the situation remains uncertain as covid-19 continues to affect economic activity, employment, and inflation. The stimulus bill mentioned previously will boost the U.S. economy thereby also increasing inflation. As of March 17, inflation remains below the Fed’s target of 2%. The Fed decided on their meeting in March to keep interest rates in the range of 0% to 0.25% as can be seen from the graph below.

The Fed expects interest rates to remain in this range until the conditions on the labor market have improved to maximum employment and inflation exceeding 2%. To support the flow of credit, the Fed decided that it will continue its asset purchase program, thereby increasing its holdings of Treasury securities by at least $80 billion per month and agency mortgage-backed securities by a minimum of $40 billion per month.

Europe

After a sharp recovery in Q3 2020 following the massive downturn in Q2 2020, the economy within the European Union contracted by a small amount in Q4. GDP growth YoY in Q4 2020 was -4.9% compared to -4.3% in Q3 whereas the growth rate QoQ was -0.7%. PMI in Europe has continued to improve to a value of 57.9 in February compared to levels around 55 in the previous months, all still above the threshold of 50 signaling expansion. Unemployment levels continue to be above levels seen before the pandemic although dropping slightly in the latest months with a current level of unemployment of 8.1%.

The European Central Bank (ECB) decided in March to continue their pandemic emergency purchase program (PEPP). This means that the ECB will conduct net asset purchases totaling €1,850 billion until at least the end of March 2022 or the covid-19 crisis is over. In addition, the pace of purchases in PEPP is expected to be higher over the next quarter compared to the first months of 2021. Furthermore, the asset purchase program (APP) will continue at the same level as long as it is necessary. The ECB expects interest rates to remain at current levels until the inflation outlook converges close to, but below 2% and announced that they will continue to provide liquidity by refinancing operations.

China

As opposed to the U.S. and Europe, the Chinese economy has recovered much faster following the effects of covid-19. In terms of GDP growth, China is back above levels seen before the pandemic with a GDP growth rate YoY above 6% in the last quarter of 2020. The PMI index in China has not shown the same high numbers as has been the case in the U.S. and Europe. In the previous months, the Caixin PMI has decreased by a small amount although still above the threshold of 50.

The Chinese economy appears to be in better shape than both the U.S. and Europe which could be contributed to strict lockdown measures and stimulus packages to help businesses. Furthermore, investments from the government and the growing global demand for Chinese goods have also helped support the economy.

Fundamentals

With a worldwide pandemic, 2020 was a challenging year for energy demand. Oil demand contracted by 8,7 million barrels per day, however in 2021 expectations are that demand is expected to rebound by 5,5 mb/d and for the first quarter of the year consumption has indeed been slightly higher than expected due to cold weather in northern Asia, Europe, and the U.S. This can also be seen on the graph below, which has seen a small increase for the first quarter of the year.

As the world tries to get past the pandemic, vaccine deployment is instrumental in supporting demand projections. Throughout 2021 demand is set to rise vaccination programs intensify and containment measures are eased, however, it should be noted that we are not in the clear just yet as we recently have seen issues regarding the vaccination and renewal of lockdowns in several European countries. It is expected that global demand will recover around 60% of the volume during 2021, and it is projected that 2019 levels will be reached again in 2023 according to the EIA. With the prospect of increased demand, a sharp decline in inventories during the second half of the year seems likely. Especially if OPEC+ production restraints continue and demand remains at current projections.

Chinese demand has also been a demand driver as Chinese refinery runs were 2,2mb/d higher than the same period last year. It is estimated that Chinese refinery runs have reached a record high of 14,3 mb/d in February.

Gasoline Demand

We have seen declines in the inventory for gasoline lately. This in part, due to an easing of restrictive measures. Commuters are usually one of the large consumers of gasoline, which has been heavily reduced during the past year. In recent statistics, we can see that in several of the world’s largest cities the number of commuters has risen compared to the beginning of lockdowns. Adding to this we can see that U.S. Gasoline inventor has fallen thereby indicating that demand has risen.

Jet Fuel Demand

Jet fuel/kerosene has been one of the most affected products during the Covid-19 pandemic. However, even though demand is still far below levels seen prior to Covid-19 there is some positive news. Commercial flights are back to two-thirds of comparable pre-covid levels, this is the most activity we have seen since the onset of lockdowns. In the U.S. we have seen foot traffic in airports picking up to over 1 million daily passengers. Also in China, we have seen an increase in the number of trips climbing to 23,9 million trips in February, this is an increase of over 300% compared to last year when the initial stages of Covid-19 had grounded many of the country’s jets. In Europe air traffic is still at about a third of pre-pandemic levels, however, this is still higher than previous forecasts. The uptick in the number of flights can also be seen in the uptick in kerosene output.

Supply

On the supply side, a lot of attention has been on OPEC+ trying to prevent a glut. This has resulted in OPEC+ prolonging most of their output cuts through April. In addition to this Saudi Arabia has agreed to prolong their additional 1 mb/d cut. Non-OPEC+ producers will see output rise by 700 kb/d in 2021 after we have seen a 1,3 mb/d decline in 2020. In the U.S. we are expecting supply to decline by 180 kb/d in 2012 after we have seen a fall of 600 kb/d last year.

The cold snap in the U.S. also had a profound effect on global supply in February as we saw it drop by 2 mb/d to 91,6 mb/d. in addition to this global refinery, throughput declined by 1,9 mb/d in February compared to January. However, at the same time, we saw Chinese refinery runs rise to being 2,2 mb/d higher than the same period a year ago.

Recent data has shown OECD stocks fall for a sixth consecutive month in January by an average of 14,2mb. However, it should be noted that inventories are still 63,2mb above their 2016-2020 average. Contrary to the seasonal norm we have seen large draws during February from both the U.S. Europe and Japan, this is primarily due to declining gasoline and middle distillates in the U.S.

We have also seen the number of active oil rigs in the U.S. rise during the period, this is often an indicator of increased production in the future.

Supply Drivers

EIA recently stated that an expected increase in global oil supply will see inventories rising by almost 0,4 million b/d in the second half of 2021 and will balance out in 2022. Much of this depends on future production decisions by OPEC+, the responsiveness of U.S. production to higher oil prices, and of course if there come any larger changes to the current demand projections.

U.S. shale

U.S. production was affected by the deep freeze temperature that we saw during February. Due to production infrastructure in the American south not being prepared for this kind of weather, much production had to be put on hold. This has however not affected the Rig count which has seen a steady rise throughout the period. This development can be attributed to the rise in crude oil prices driven by the OPEC+ output cuts. However, as the increase in the number of rigs has not increased to levels seen prior to the pandemic, this indicates that companies are committed to keep production levels and use any price gains to pay down debt or boost investor return.

Gas - TTH Herren

During the first quarter of the year, we have seen gas prices being somewhat volatile. With the onset of some cold weather throughout the period, we have seen prices rise. The temperature in northeast Asia fell to its coldest since 1966, directing LNG to Asia thereby driving up prices in Europe. The cold weather has drawn on storage in Europe and Ukraine to levels that are significantly below that of a year ago.
Another indicator for TTF prices is EUA where we have seen the price of EUA’s rise during the first quarter. As Gas emits fewer emissions than alternatives such as Coal, gas prices will naturally rise as the price of emission certificates rises.

Summary

Economic activity has continued to recover from the drastic drop that occurred when covid-19 spread around the world at the beginning of 2020. The economic conditions in the U.S. and EU are still below the levels observed before the pandemic while China has managed to recover better. The governments and central banks continue to do everything in their power to support the economy by keeping interest rates low and continuing their massive purchase programs. The situation remains highly dependent on the development in the spread of covid-19 and the vaccines.

About the report

How is the report structured?

The report is divided into three parts – each part elaborates on three main topics which are influencing the oil prices:

Geopolitics – covering the situation in unstable oil producing regions of the world
Financials – covering speculators’ interest and the development of the financial market
Fundamentals – covering the supply and demand balance

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