Roughly two weeks ago, most of the analysts and we anticipated another wave of price fluctuations. We called this “the second wave.” However, most of the timing was limited between mid-May and mid-June. The rationale was simple. When the storages are full, oil prices will be hit again. As of today, the so-called “second wave” has started earlier than expected. Now, the question remains whether there will be a Third Wave?
The oil market was never precisely a domestic animal. It was a beast under control. As the control gets loose, the chaos triumphs. This chaos hits from micro to macro level. Last week we read news about Norway’s Oil Fund manager’s expenses as well as Singapore oil trader Hin Leong Trading’s hiding of 800million dollars of losses. Surely there will be more scandals to come, but these are backgrounds to the main show.
IEA April report was a big blow to oil markets as Fatih Birol referred to April as Black April. He previously saw Abqaiq attacks as a “heart attack” and the spat between Saudi Arabia and Russia as a “Russian roulette in oil markets.” When we look back to the past six months, it is not an exaggeration to claim that the oil markets are in a new kind of chaos. This chaos will not settle soon; that is what everybody is saying. But the main question is whether this new generation of chaos will breed new disturbances.
One simple example is probably the delay in the OPEC report last Thursday. It was scheduled for the morning then noon. It was perhaps delayed three times and finally published. I can feel the stress they are under to convey the right message -politically -. OPEC and IEA reports were hugely different in demand predictions Year-on-Year:
- For 2020 (all year), OPEC -6.8 mb/d ; IEA -9.3 mb/d
- For 2020Q2, OPEC: -12mb/d; IEA -23.1 mb/d
- For April 2020, OPEC: ?; IEA -29mb/d
In every energy crisis, same message has prevailed: the importance of data and reporting. Two major organizations are relying on the same data but came up with different results, which is normal. IEA has said to use satellite data for storage numbers. But floating storage numbers are mere predictions. That ambiguity may define the shape of the third Wave.
Fast forwarding a little bit, let’s assume that by the end of July, most of the consumer demand is back. Air travel may need more time. The data tells us that from 5 May to mid June there may be wild fluctuations in oil prices due to rolling of contracts and close to full storage levels. Meanwhile markets are reporting an influx of money to June contracts. May-June will be a volatile period, but end of July may most likely be positive.
There is another facade of May-June period. These prices set the oil-linked natural gas prices for the winter. The lowest prices in oil may create another shock for natural gas producers, this will be tested as we move forward.
One important parameter to watch is the result of US elections. If May-June is the first joint in our forecast, second joint should be US elections.
Then we have to create our scenarios for the timeline beyond June. One of the most critical scenarios will be geopolitics, the second will be economics, and probably the third will be “the second wave -in pandemic-”. The geopolitics scenario should capture the disturbances in oil-producing economies and the effect of their lost revenues on other countries.
Economics scenario should be based on whether “new initiatives” or “deals” can push the world forward. The creative destruction takes time, therefore most of the politicians will first try to resurrect the status quo. Then this status quo may move into the new direction.
Second Wave in the Covid19 pandemic is a possibility. The Second Wave of this pandemic may not be as effective. Governments will probably be more informed and ready to act and coordinate.
The world will change. This was true before covid19 and it will be true after covid19. If you look at the oil demand graph from the 1960s to present, you may well see two separate trends in oil demand growth. The first one was the stable and high growth up until oil crises 1973-74 and 79-80. The long term growth trend was broken and slowed. When you check the aftermath of Covid19, long term oil demand growth may have been broken once again.
That doesn’t mean oil prices will be lower forever. Most probably, the government initiatives and plans will try to stimulate the economy, and the middle class will buy more cars due to avoid public transport. But renewable and tech R&D has earned a valuable break to come up with more market-based solutions. If governments put the money in the right baskets, long term oil demand growth will be broken for the third time.