Covid Strikes Back

The Oil market had fairly well anticipated the continuation of OPEC + cuts but the Shale Oil thank you and relapse will have been short lived with a resurgence of COVID cases in China and in the USA whilst the situation in India is becoming very dire.

In this context, it is likely that WTI retest levels below $ 30 but the long-term scenario is intact. In fact, current weakness is the warranty that Oil prices will surge next year as the L shaped supply hypothesis is confirmed by a weaker short-term environment.

Very little attention is paid to geopolitics. Firstly, the situation in Libya is far from solved with Haftar soldiers raiding again Al Sharara fields. The Americans have established the Iranian make of the missiles that blasted Abqaiq and Khurays installation whilst Iranians tankers are braving the US embargo on Venezuela. It is unlikely that China or Russia support a renewal of the Iranian embargo, which could lead again to an escalation of sanctions with a cornered Donald Trump firing in all directions to try to be re-elected.  A Democrat victory is indeed not discounted and it will add to the miseries of shale oil. The Democrats will surely make it much harder to get a permit to drill and that may lead to a fall of 1 million barrels of shale production. With a number of active rigs now below 200 from over 860 last year, the future production of shale is going to collapse at least 40% as today’s fields in activity may only have 6-8 months of economic production life remaining.

On shipping, the big challenge short term is for LNG tankers with the JKM/Henry Hub quasi flat. A lot of cargoes in July and August have been canceled on the GUM-South East Asia very profitable ton/mile route as the arbitrage does not pay. Whereas VLCC rates are still in a profitable zone (50/60,000 $ a day) it is not anymore the case for Suezmaxes, Aframaxes, or LR2. The trade could be revived short term by a re-confinement of the economy as a consequence of new covid cases although we do not think that Any government will dare shutting down their economy again given the pain already inflicted by the recent shutdowns. A key challenge for Shipping is the change of crews as very well explained by Hugo de Stoop, Euronav CEO. What impact it will have on traffic remains to be seen. In the meantime, Bulkers are still enjoying a nice rally in the freight rates as the Brail iron story resurface and China is boosting its imports of iron ore. Let us hope Covid does not change the tune.