Liberation Day approaches

Oil demand could surge following the arrival of a vaccine for Covid-19, possibly as early as early 2021. This key moment, or “Liberation Day”, will see life slowly return to normal, with an increase in oil prices. Listen to a discussion on why the market is nihilistic” and the impact of Opec cuts, Libyan supply and the US election. 

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guest: 

• Bjarne Schieldrop, Chief Analyst Commodities, SEB. 

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:29

Hello, listeners and welcome to the Montel Weekly Podcast, bring you energy matters in an informal setting. Today's pod returns to the oil market, the most global and most traded energy commodity prices crashed to $15 a barrel at the height of the peak of the COVID-19 pandemic in April. But have since recovered to around $40. My name is Richard Sverrisson and here to help us understand current market dynamics and the outlook going forward is Bjarne Schieldrop, analyst at SEBA Bank. Warm. Welcome to you BRM.

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 1:01

Thank you very much. Good to be here again. Thank you for inviting me again.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:04

So we're seen benchmark crude prices. They're around $40 a barrel. What are the main drivers at the moment? Bna? Is it, is it all COVID-19 and opec, or, uh, is there anything else going on?

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 1:14

I mean, right now definitely the oil market is hit, uh, from both sides of the equation. You know, on the supply side, we certainly see that Libyan oil production is reviving from almost zero in August. And now back to 700,000 barrels per day and, and moving rapidly up towards a million barrels per day. Within, uh, three, four weeks is the message, and it's the truth between the east and the west. And General Hoft from the east is going to have a meeting with, with official government in Tripoli within, uh, the next month to issue, uh, a common ground. Election. So you know, the fighting is at least over for now and the production is reviving rapidly. So supply is really rapidly coming online and, and we don't really need another million barrels per day into the market like we do get now from, from Libya. And, and of course this coincides very unhappily with the fact of this revival and new wave of COVID infections and lockdowns in Europe and thus weaker oil demand.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:16

So you think the Libyan production could hit a million barrels this year per day? I mean,

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 2:21

that is what it looks. I mean, it has been reached already 700,000 barrels per day since the start of revival in September. And the signals are, are a rapid opening of, uh, production and export. And at the same time, we see now demand is weakening again. I mean, jet fuel demand in Europe provide from very low levels earlier in the year and due to. You know, uh, the sense that we had control of infections in Europe and uh, summer vacation season, and then we probably stood that, uh, something like 60% down year on year in August. But now it's probably more like 80 to 90% down year on year in September, October. It's like, it's not a question of are we going to fly a little bit or 50% less than normal? I mean, governments are saying no. Employers are saying no, insurance companies are saying no. Your spouse is saying no. I mean, we're basically not flying at all. You know, it's the result. It's almost digital, right?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:22

Absolutely. So when will we return to the skies? You like Brianna? I mean, maybe until next year or 2022?

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 3:28

I think, uh, myself included and, and most people, they are just. You know, desperate about getting on an airplane and travel the world. And I think a good example in case here is if you look at aviation activity in China, which of course managed to get control in total control over this, uh, COVID-19 infections and their domestic flights are back to pre COVID levels, basically showing you that. All this talk about now onwards, we're just going to work from computers, from at home. We're not going to fly again, and so on. I don't buy that a second. You know, the moment we have vaccines being rolled out, making it safe again to fly and to socialize, we are going to do that. You know, I think it's going to be pretty digital in terms of rolling out vaccines, in terms of both flying and activity in general.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:23

Let's hope there'll be some airlines left in Europe by the time we, we get to an airport again. Uh, Bjarne

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 4:28

well, you know, I mean all the planes are still there and, you know, all the pilots are still there. So it's just a sort of a shift of ownership, I guess. It's sad and, and painful, but, you know, uh, all the, all the capitalists there, all the knowledge and no Wow. Is still there. All the airports are still there, so, you know, if people want to fly, it's not a problem to fly.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:46

Absolutely. But you mentioned the. Potential imminent lockdown in parts of Europe. What's the outlook here? What's your view? I mean, certainly that's happening in Europe, but potentially other parts of the world as well. How is that gonna hit the market? I mean, for example, is the market pricing 2021 correctly in your view?

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 5:04

You know, I think that is a very, very important question and good question. And you know, I mean, if you look at the oil market, it's a massive physical system. And out of that comes the spot price as a, as a struggle to try to balance supply demand. That is the job of the spot price, so to say. And I definitely would say that, you know, the Spot Price is the conductor of the whole Energy Orchestra, and it's also the conductor of the forward prices. I mean, if you look at statements from Saudi Arabia historically, when they're asked about hypothetical questions, what do you think you'll do if so and so happens? And the typical response from OPEC and Saudi Arabia has been, we'll deal with that. When we get to that point, if we get there. And it's basically, you know, reactivity is mostly the approach of OPEC and Saudi Arabia rather than proactivity. You take it when it comes because it's so hard to predict. And I think if you look at the market now, it's like. Has given up trying to figure out what is going to happen next year and the year after. It's kind of nearly stick and saying, okay, the spot today is like, yeah, $40 and you know, what do you think about the oil price next year and the year after, you know, a couple of $40, something like that. And I guess you can buy 2022 swap for bread crew. That $43, uh, it was 44 70 the other day and, and maybe it's down to 44 now. With brand crude, uh, tipping down below $40, you know, so low spot prices just unavoidably, drags down the forward prices. And, and, you know, I think, um, to compare a little bit, you know, the worst year in your time, except for this year was 2016 when brand crude averaged $44. And this year we're probably going to average 41 50, something like that. Depends on, on the rest of the year, but roughly there. So when you then can buy 2022 at. Let's say $44. It's basically saying that, well, you know, it's probably been even 2022 is, or implicit in that price is basically the statement that even 2022 is going to be just as bad as 2016 and only a couple of dollars better than the worst of the worst years with the pandemic in 2020. You know? So I think it, it's not really any strong view in that forward price. It's controlled by the spot price because it doesn't really make sense that everything is as bad in 2022 as it's this year. Right.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:41

So that's what you mean by saying that the market is realistic, if you like. It's not really, it has no view beyond the immediate months ahead.

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 7:50

It doesn't dare to believe that the future is going to be any, any different from the current spot. That's, that is what it's doing. Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:56

Okay. Maybe the months ahead then, I mean, do you expect or what's the potential for prices to crash? In the same way they did March and April. I mean, we're seeing the incidence of infection not death so much from COVID Ovid 19, uh, fortunately, but certainly in the rate of infection in some countries is even higher than it was in the first wave of the pandemic. So what's the likelihood for prices to crash to the level that we saw in March or April?

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 8:23

I think what we saw this spring was, of course amplified massively by the price war between Saudi Arabia and Russia. Or basically, you know, Mohammad bin Salm, the ruling princes in Saudi Arabia, just completely lost it. And the blasted production write up while, you know, uh, Russia basically just held its course rather anything. But, you know, in April they really tried, the OPEC really tried to stuff oil down the throat of the global market at the same time as we had the COVID-19 outbreak. You know, it was really a, a really bad, bad combination. And of course now it's bad, but we are very unlikely to have a new price war in that kind of sense. We're definitely having worsening fundamentals with more supply coming in at the same time as we have lockdown and weakening demand. So that is definitely negative, but we don't have a price war on top. Mm. You know, they are holding back very steadily. You know, they're not wiggling back and forth. They have a very, very steady message. One could have hoped for OPEC plus in the face of disappointing and normalization. You know, all, all expectations were that it was better in the summer. Then it's get even better in August, September, and then it's even better in Q4. And by Q4, oil demand is probably down only by 5%, year on year while production is is down. Seven, 8% year on year and a massive draw in inventories. You know, that was the sort of the projection from the US and the International Energy Agency as late as September and, and I think maybe even in the October report of the US Energy Department had that kind of view of down only 5% year on year for global demand, you know, with, with massive inventory draw as a consequence. But now we, we have, you know, a weakening of the fundamentals right now and we don't see any. Signals from OPEC plus that at the moment they are willing to cut deeper again, right here and now. They, we do see statements that the worst is over, you know, and, and in retrospect, I, I agree it won't be as bad as in April and early May. You know, that is for sure. But you know, now we've broken down below 40 and OPEC is not lifting a finger. So most definitely, yes, it's, it's absolutely possible that, you know, the oil market is whacked completely and we, we moved down to $30, but we're not moving down to minus $37 again, in, in the VTI price, like we saw in the crazy days in April, may. So

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:57

no negative price, but I want to just stick to the, to the OPEC plus group. They're continuing to taper production cuts, but do you think they will continue to do this from January? So meaning. An additional supply increase by around 20 million barrels a day.

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 11:13

2 million barrels per day. Yeah. You know, that is the plan to increase production from OPEC plus by 1.9 million barrels per day into January. And, and it was discussed at last week's joint ministerial monitoring committee meeting, and the conclusion was that, you know, we're not going to, it's too early really to make that decision. You know, we have to look at, look at upon how are things going to develop, and the next official meeting is, uh, 30th of November to the 1st of December, and that is when they're going to make that decision whether to hold current cuts or to tape with them and increase production by 1.9 million barrels into January. And you know, they have been stating that they're going to be reactive and act on this. They're not going to just let the oil market sell its own way. And I think if you think Ill logically, you know, I think if you look at, um, the C 19 vaccine, the COVID-19 vaccine, it's really not a matter of if that when we get these vaccines being rolled out. And I think that is going to be a really a see change moment. Because arguments against that is going to be the liberation day. You know, I call it the liberation day when we get the vaccines being rolled out into market, because then we can suddenly start to move freely around again and use cars in the airplane and, uh, meet the face-to-face and go to restaurants and all of that. You know, arguments are against the really, that being a liberation day is the, well, you know, it, it'll take until 2025 until we can vaccinate the whole Google global population of close to 8 billion people. But you know, in my view, I don't think you need to vaccinate everyone because it's predominantly old people who are dying. Mm. Right. It, it's not everyone you know, so who needs the vaccine? It's the older part of the population and then it's health personnel and then, you know, most other people will be fine. More or less, of course some will die, some will be sick. But you know, that ha happens with any other disease, uh, around in the population as well. So that is no different from, but it, it's very specifically for COVID-19, that it's the older part of the population really being hit badly, assuming you know that. I think the general assumption is that. If you look at your base risk of dying each year, you know, I'm 55 years old, I have a base risk of dying, of point 34%. If I did get COVID-19 for certain, then the general estimate is that my base risk is doubling to 0.68. But if you are 85 or 90. Your base risk of dying is like, uh, 10 to 15%. So suddenly getting COVID-19 makes that jump to 30%, you know, so that is significant, but, uh, it's a very low risk for me. And then it's very low risk for, for people who are younger and have, uh, very low base risk and are really healthy. So I think vaccinating the old part of the population. You don't need to vaccinate the whole population and then suddenly, you know, you are kind of liberated. And I think that change is going to be almost as dramatic as the negative change when the world was hit by COVID-19. But you know, all projections, all prognosis. Are always smoothed out. It's always very difficult to project and predict, you know, digital jumps. And that is why we, we are always so surprised when we get this very sort of sea change moments and I think, um, that is going to be with us in the first half of next year and it's going to be radical and, and demand for oil is going to be. Moving up very rapidly and the spot price will follow,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:56

but in the immediate short term. Now, bna, do you think then that if you mentioned we've gone below $40 a barrel now, does will OPEC react to pressure to make more cuts tobolt the price above 40 again, or will it wait until there's the vaccine or the news on the vaccine maybe in the later this year or early next year?

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 15:15

Exactly. I think here comes the logic. You know, if also OPEC sees that we are at very, very likely going to have a vaccine available in the market, either in late December or in Q1 or latest Q2. Then why should they increase production, increase inventories and damage the oil market for another nine months due to high inventories, rather than just hold onto their current cuts for another three months until we get sort of to liberation they, you know, so I think logic calls for the fact that opec, if there is a need for it, will stay at current production cut levels also in Q1. Await that moment in time. When that happens, I think rather than just sort of say, all right, we go by the rule and we increase production, and then we have damage done for another nine months of, of, uh, elevated inventories.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:08

But then also you've got Libya here, which must be an added headache for opec if you've got a million barrels per day coming in from North Africa,

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 16:14

uh, most definitely. It's really not what you wanted at this point in time. Absolutely not. And that is not, again, argument for maybe why you want to hold out for another quarter with increasing production and reducing your cuts. But, uh, of course into this also comes the US election. With its own ramification and impact on expectations for the coming years. And, and of course a Biden win has a very, very strong, clear consequences for oil markets.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:42

Could you explain those consequences? That was gonna be my my next question actually. Uh, be honest. So, so if you, because a Biden win would maybe bring it more into the sort of climate policies or align the US with climate policies in the US or China or Japan, would it not, but what, what are the consequences for the oil market of a Biden win?

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 17:00

You know, I think, uh, one very clear consequence is that Biden, you know, he was vice president under Obama, and Obama was architect of the J one nuclear deal with Iran, and Biden is a strong supporter of that deal, which Donald Trump withdrew from. So most definitely, Biden will revive the JC Iran nuclear deal and reinstate it. Iran won't be able to increase production immediately, not before it actually complies with the JCP deal, but then it looks like Iran most likely will move back into the market in 2022 with a million or one and a half million barrels by then. And of course, this is a red flag for Saudi Arabia, you know, because they don't want to hold back a lot of supply. Just to make room for Iran, which basically means that Saudi Arabia will be back to lean to the market before Iran starts to increase production. So, you know, our Biden win puts a little bit, you know, we we're cyclically bullish on oil prices in sort of a small cyclicality for the next three years. But, but of course, return of. Iranian supply is reducing that, that sort of, um, structural scenario a little bit. Not for 2021, but for 2022, it adds more supply into the market. But I don't, I do think that if you look at the current cuts of OPEC plus today, all of those cuts needs to be reversed until 2022 in order to make enough supply for the market when the oil demand revives. So I think, uh, on global oil demand will probably be back to normal and above sometime during the second half of next year, and then increase per, uh, the increasing demand into 2022.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:47

Absolutely. Fair enough. Brian, what about, for example, if we get a very cold winter, it's looking like, you know, EO come into play here. Would that also boost? I mean, we're talking in the short term here. Uh, give a a short term injection in the arm to the oil market. Exactly.

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 19:05

I think the sad story here is that we are swimming in the middle lit inventories. You know, we have a massive amount of, and just because, you know, refineries are blending jet fuel directly into the diesel stream and the gas oil stream because they don't know what to do with the jet fuel because no one are using it tragically enough. Um, resorting in, in very high inventories of, uh, middle s and diesel and, and we can look at that. You know, the gas oil crack and the gas will being sort of the central of the middle market, uh, and the gas will crack is like, yeah, one and a half dollars ridiculously low versus brand crude. And normally it's like 14, $15 above brand crude at this time of year, you know, and then that is a, it's a very good example of how bad things are. So a cold ries, of course, positive for the, for oil market, and it is expected. To be called normal due to the La Nina-effekt, But, uh, we have too much in storage to really make a strong, bullish impact on, on the market. But it, it'll of course, help on the margin, but no, it won't be enough to drive the market in a, a strongly bullish direction. Most likely not.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:14

Yeah. You, you talked about the short term demand and midterm sort of 20 22, 23. But what about the longer term? You could see the big oil companies, the big oil and gas majors are looking to invest in renewables. I mean, is this, can we take this very seriously? Is this the future? Are they seeing the end of oil and, and a brighter green future?

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 20:36

You know, I think we can go back a little bit step, uh, back to the US election and if Biden wins. You know, it's, it's of course very bullish for green green transition because then now you have, um, even stronger push in Europe with, you know, carbon neutrality by 2050 reduction versus 90 90 of, uh, 55% is the suggestion from the EU commission and China also stepping in with, with the obligation or promises of, uh, carbon neutrality by 2060. And then, so if Biden wins and then Jo rejoins the Paris Agreement, you know, then you basically have sort of this three major economic centers promising cuts to, to CO2 and strong progression towards CO2 neutrality. You know, that is a massive political alignment. So I think it's hugely important. You know, oil has always been in competition with the electricity from coal and gas, and, and the oil was also used extensively for e electricity in the early seventies and, and still is to some degree in the diesel aggregates around the world. So, you know, adding solar and wind into the market is nothing new in itself for oil because it's also electrons, you know, solar and wind is electricity, you know, so it's, it's not a sort of a sea change moment that you produce much more electricity from solar and. Then you used to produce a lot of electricity from coal and gas before, you know? So I think the sea change moment is one effect of, of producing a lot more solar and wind, both due to technology and falling and declining costs for these technologies and this source of energy and, and also added speed with political drive behind it from the three main sectors in the world, economic sectors, China, Europe, and, and the us. If, if Biden wins. Just sort of the impact. It is, of course, low coal and gas prices. I think the radical thing for oil is electrification of transportation. That is the radical thing.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:46

Absolutely. And that that's something that the, uh. The policy makers in Brussels have firmly set their eyes on and, and, and to achieve in the next 10 to to 30 years. So bi it fascinating to chat about these issues. There's certainly enough here to keep us occupied for the coming weeks at least, if not months and years. And, uh, I hope we can chat again soon, whether that be, uh, before liberation day or after we shall we shall see. But, but Binu, thank you very much for joining them on podcast this week.

Bjarne Schieldrop, Chief Analyst Commodities, SEB: 23:14

Thank you for having me.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 23:15

Have a nice day. Thank you. That's about all from the Montel Weekly podcast this week. Thank you very much to bne. You can now follow the podcast on our own Twitter account, the Monte Weekly podcast account. Please direct message any suggestions or questions or any ideas for guests on the show. You can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with everything that's happening in the energy markets on Montel News. You can subscribe to the podcast on Apple Podcast, Spotify, or wherever you get your podcast from. Please remember to rate and review us. That helps us to improve. Thank you and goodbye.