Murban futures launch, OPEC+ and Q1 2021

The first crude quarter of 2021 threw up a number of interesting developments for the oil markets, from fluctuating price sentiments to a divergence of views on the global supply-demand dynamic. More on market permutations later, but the Oilholic would like to kick-off this post by flagging a historic development that carries the potential of bringing about profound changes to the crude futures market – the launch of the Murban Futures contract.

It had been long-time coming with ambitions for the contract launch first surfacing early in 2019, and official confirmation arriving later that year. Market upheaval caused by the Covid-19 pandemic pushed the launch forward to 2021, when on March 29 the contract launched with a debut price of $63.43 per barrel. 

And with it history was made – Murban, traded on IntercontinentalExchange Futures Abu Dhabi, is the world's first futures contract predicated on the Abu Dhabi National Oil Company's (ADNOC) flagship onshore crude oil. It means the offered market positions are directly linked to a major regional production centre. 

Alongside ADNOC as its backer, are nine of the world's largest energy traders including BP, ENEOS, GS Caltex, INPEX, PetroChina, PTT, Shell, Total and Vitol. Their hope is that physical oil traders use it as a benchmark, and price quality differentials off it accordingly as is the case with Brent. If physical traders are convinced that the new benchmark is reasonably liquid, it would take liquidity away from WTI, Brent and Dubai crude.

That is no mean feat and there have been previous false dawns in the region. To improve the odds of the benchmark's success, ADNOC has removed destination restrictions on the crude setting Murban apart from its regional competitors who have historically been bogged down by such limitations. And Asian refiners will now have a direct means to hedge against shifts in the price of Murban, rather than using derivatives linked to Dubai crude.

Of late, ADNOC’s production levels have averaged above 2 million bpd, with half of it set aside for the export market. In Fujairah - the main delivery point for Murban - ADNOC is currently building underground storage caverns that will be able to hold 42 million barrels of crude, including Murban. This will further strengthen the physical barrel underpinning of Murban futures. All in all, a very noteworthy development that carries a reasonably high chance of success over the coming years. Here's the Oilholic’s more detailed take on the development via Forbes.

Switching tack from the debut of Murban futures to the crude world in general, bullish sentiment that took hold in November 2020 has catapulted oil prices from $40 to $60-plus levels for both Brent and WTI. There's now chatter of $100 per barrel medium-term prices and a spike to even $190 in certain circumstances if you are to believe JPMorgan. 

This is nothing short barmy chatter by the longs and is wildly optimistic. In terms of reconciling expected crude oil demand in a post-Covid world versus supply, the Oilholic reckons the paper market is running two to three quarters, or around $5 per barrel, ahead of the physical market. 

Economic output in key markets remains sluggish, while the International Energy Agency (IEA) does not expect crude demand to catch up with supply until the third quarter of 2021. As for OPEC+, while its market calls on March 4 and April 1 have been described as bullish, they are in truth really bearish. 

On March 4, OPEC+'s headline production cut level was pegged at 7 million bpd, along with an additional and surprising voluntary cut of 1 million bpd by Saudi Arabia alone. However, Russia and Kazakhstan were allowed to marginally increase their output to keep the OPEC+ peace.

And on April 1, OPEC+ said an additional 350,000 bpd will be added to production, with another 350,000 in June. From July, output will be increased by 450,000 bpd. Both OPEC+ announcements cheered the bulls. However, the market remains in real danger of getting ahead itself. That’s all for the moment folks! Keep reading, keep it crude!

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© Gaurav Sharma 2021. Photo: Kristina Kasputienė from Pixabay

Oil will rally in 2021 but joy would be short-lived

Oh what a 'crude' year 2020 turned out to be as the Covid-19 pandemic ravaged the global economy and our lives, and even briefly created the aberration of negative oil prices back in April. Few would be unhappy to see the back of 2020, and the Oilholic is most certainly among them.

However, as a new trading year beckons, it is best cut out the din, and trade both the direction of the oil market as well as energy stocks with a level head. First off, all the doomsday oil demand decline scenarios from earlier in the year, of as much as 20 million barrels per day (bpd) on 2019 levels, simply did not materialise.

The actual figure is likely to be shy of 9 million bpd, which, while wiping out nearly a decade's worth of demand growth on an annualised basis, is nowhere near as catastrophic. Economic signals point to a rebound in post-pandemic demand when human mobility, consumption and core economic activity, especially in East Asia and the Indian subcontinent begin a rapid bounce back in 2021.

So what of the oil price? Using Brent as a benchmark, the Oilholic envisages a short-lived bounce to $60 per barrel before/by the midway point of the year, and on the slightest nudge that civil aviation is limping back to normal. However, yours truly firmly believes it won't last.

That's because the uptick would create a crude producers' pile-on regardless of what OPEC+ does or doesn't. Say what people might, US shale isn't dead and there remains a competitive market for American crude, especially light sweet crude, that will perk up in 2021.

Other non-OPEC producers will continue to up production on firmer oil prices as well. And finally, a Joe Biden White House would bring incremental Iranian barrels into play even if the return of the Islamic Republic's barrels is more likely to be a trickle rather than a waterfall. All of the above factors will combine to create a sub-$60/bbl median for the demand recovery year that 2021 will be. And the said price range of $50-60 will be just fine for many producers.

As for energy stocks, who can escape the battering they took in 2020. By the Oilholic's calculations, valuations on average fell by 35% on an annualised basis, and nearly 50% for some big names in the industry. 

However, based on fundamentals, where the oil price is likely to average in 2021 (~base case $55/bbl), portfolio optimisation and an uptick in demand, yours truly expects at least a third of that valuation decline to be clawed back over the next 12 months. And depending on how China and India perform, we could see a 15-20% uptick.

Of course, not all energy stocks will shine equally, and the Oilholic isn't offering investment advice. But if asked to pick out of the 'crude' lot – the horses yours truly would back in 2021 would be BP and Chevron. That's all for the moment folks! Keep reading, keep it 'crude'! Here's to 2021!

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© Gaurav Sharma 2020. Photo: Terry McGraw/Pixabay