Tag: Oil

The Return of Travel Could Drive Oil in 2021

Author: Blu Putnam, CME Group

AT A GLANCE:
· The number of passengers flowing through US Transportation Security Authority (TSA) security check points has shrunk to levels about 60% below pre-pandemic numbers
· Companies are planning for less business travel than in the pre-pandemic world, even when health fears recede

Heading into 2021, the path of COVID-19 appears to be a primary driver of oil prices, relegating some important fundamentals to a secondary role.

U.S. shale production may shrink further in 2021 so long as WTI crude oil prices hover around $40/barrel. Libyan and Iranian production is increasing. Saudi Arabia and Russia are maintaining production discipline. All these are critical supply factors to consider.

Can Transportation Rebound?
The primary driver for oil in 2021 may well be the path of the virus and how it influences the transportation industry, especially airlines. Jet fuel is a meaningful component of oil demand in its refined state, and airline travel remains severely constrained in countries where the virus has not been well contained.

As 2020 draws to a close, another wave of the virus appears to be keeping U.S. domestic travel demand severely dampened. The number of passengers flowing through TSA security check points each day has flat-lined at levels about 60% below pre-pandemic numbers.

The picture is the same in Europe, where travel among countries is highly constrained.

China is the only outlier. The virus hit China first. However, China was also the first country to make solid progress in containing the domestic spread of the virus. Chinese domestic air travel is now almost 90% back to pre-pandemic levels.

International air travel has not started to recover anywhere, as most countries still impose quarantine restrictions on arriving passengers, and there are very few flights anyway.

Less Business Travel Expected
Even when a vaccine arrives and progress is made globally in containing the virus, business travel may take years to recover to pre-pandemic levels. Work from home and virtual meetings have taken over the business world. Companies are planning for considerably less business travel than in the pre-pandemic world, even when health fears recede, and travel restrictions disappear.

The collision of the virus’s influence on demand with complex supply fundamentals may make for a volatile year for oil prices. The path of the virus may determine the broad trend, up or down, from a demand perspective, while the ebbs and flows of supply surprises around the world may generate substantial noise.

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Vaccine hopes spur major rally in oil and travel stocks

Grounded fleet of Aegean Airlines AEE, the flag carrier of Greece, as seen parked in the apron of Athens ATH LGAV International airport in the Greek Capital on July 7, 2020. A3 operates an all-Airbus fleet with A319, A320 mainly, A321 and new arrivals of modern and advanced Airbus A320NEO. The airplanes are parked with the engines covered as the airline temporarily ceased most of the operations due to the Coronavirus Covid-19 pandemic reduced traffic and travel restriction that the government imposed. Greece is restarting the summer season for tourism, one of the main income sources for the country with tighter safety measures, easing the lockdown measures and COVID Virus checks at the entry points in the country such as the airports. (Photo by Nicolas Economou/NurPhoto via Getty Images)
The airline industry’s fate looked uncertain following months of COVID-19 groundings. Photo: Nicolas Economou/NurPhoto via Getty Images

Travel and oil stocks are leading FTSE (^FTSE) gains on Tuesday as markets continue to rejoice over news of a COVID-19 vaccine.

The moves come after early findings show that a vaccine developed by Pfizer (PFE) and BioNTech SE is 90% effective in protecting people from transmission of the virus in global trials.

“Vaccine means ‘back to normal’ – it’s all about the velocity of people getting back to 2019 levels sooner which means more demand for travel, more demand for oil products (gasoline, jet fuel),” said Neil Wilson, chief markets analyst at Markets.com.

Rolls Royce (RR.L) was among the most dramatic gainers on the London index, up around 19.5% at around 11:30am in the UK. IAG was also up 9.1%.

Rolls Royce's gains remained steady on Tuesday as global markets rallied.
Rolls Royce’s gains remained steady on Tuesday as global markets rallied.

“You have also got to remember just how badly beaten down these sectors were and how they are very cheap relative to the market and relative to growth, so we are seeing a major rotation back into value stocks. In some cases too there are short squeezes going on with lots of hedgies caught the wrong side of this news,” Wilson added.

READ MORE: European markets find calm after frantic rally on COVID-19 vaccine news

In September, International Airlines Group (IAG.L) announced more cuts to flights as it adjusted to the collapse in demand for air travel. It dropped its capacity by 60% below of its 2019 levels, adding that it didn’t see a return to 2019 levels until 2023. It was also aiming to cut up to 13,000 jobs amid a bitter dispute with its union Unite over redundancies and pay cuts for cabin crews.

According to a recent Morgan Stanley note, Lufthansa (LHA.DE), IAG, and EasyJet (EZJ.L) still face a strong cash burn rate and will be close to their minimum cash levels by 2Q20, which suggests they may need to access more liquidity resources by 2021.

“With the elastic band stretched so far to the downside it makes sense that these stocks (also heavily shorted) will be big winners on the way up,” said Chris Beauchamp, chief market analyst at IG.

“Of course there’s a long way to go, but the change in sentiment should spark a more extended move to the upside as investors keep piling in in the hope of picking up some bargains, just as holidaymakers try to get some winter sun bargains for 2021. Oil [is] a similar story, hope of a return to stronger demand earlier than expected, which would help support cash flow and reduce the risk of further dividend cuts.”

The oil rally mirrored the wider stock market rally, underscoring gains for BP (BP), which was up 7.6% at around 11:50 am in London, and Royal Dutch Shell (RDSB.L) which was up 4.4%.

Both firms have been hard hit by COVID-19, with Shell planning to cut up

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Oil Set for Worst Month Since March as Virus Revival Cuts Travel

(Bloomberg) — Oil is poised for the biggest monthly slide since March on concern a resurgent pandemic in the U.S. and Europe will keep people hunkered down, crimping demand for auto and aviation fuel.

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Futures have tumbled almost 11% this month in New York and they’re near the lowest since late May in London. Infections surged to a record in the U.S. Midwest, while parts of Europe tightened restrictions to stem second waves. Meanwhile, the return of Libyan supplies added to concerns of a crude glut.

Road fuel sales in the U.K. slid for a fifth week to the lowest since July. Most European airlines trimmed regional capacity for November and December, while rising infections in the U.S. may thwart plans to increase capacity through year-end, according to Bloomberg Intelligence analysts George Ferguson and Francois Duflot.

“It’s all about Covid-19 now and its impact on consumption,” said Jeffrey Halley, a senior market analyst at Oanda Asia Pacific. “There is a realization, now that Covid-19 is headed well into the second wave in Europe, that the recovery won’t be as linear as the market has been pricing in. There will be a consumption hit from Europe for sure as we head into the winter.”

More on aviation trends:
U.S. Airline Traffic Falls 2.9% From Prior Week, Down 63% Year-on-YearEuropean Air Traffic Stable But More Pain Coming: EurocontrolAsia Pacific Hacks Flight Schedules as Winter Lands: BNEF Chart

Next week’s U.S. election promises more volatility before an OPEC+ meeting at the end of November, when members will decide whether to delay the planned easing of output cuts. The head of Saudi Aramco’s trading arm said demand may be insufficient to absorb more OPEC+ crude.

“The market may move lower again next week,” Oanda’s Halley said. “Any action to support oil has to come on the supply side from OPEC+.”



chart: U.S. crude futures set for worst month since March


© Bloomberg
U.S. crude futures set for worst month since March

The growing nervousness over supplies is being reflected in oil’s market structure. Brent’s three-month timespread was $1.46 a barrel in contango — where prompt prices are cheaper than later-dated ones. The widest contango in a month indicates rising fears of a glut.

Prices
West Texas Intermediate for December delivery fell 0.7% to $35.92 a barrel on the New York Mercantile Exchange as of 7:45 a.m. London time after losing 3.3% on ThursdayBrent for December settlement lost 35 cents to $37.30 on the ICE Futures Europe exchange after falling 3.8% in the previous sessionThe contract is down about 9% this monthCrude futures on the Shanghai International Energy Exchange fell 5.9% to 223.7 yuan a barrel

The European Central Bank is gearing up for a new stimulus package in December as renewed lockdowns threaten a double-dip recession, but an aid package in the U.S. will likely to have to wait until after the Nov. 3 election, with prolonged negotiations failing to break an impasse.

Exxon Mobil Corp. became the latest company to succumb to the virus-driven demand crash. The oil major plans to

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Oil show cancellation is latest hit for hotel industry

Every other year in October, hotels in Midland and Odessa are fully booked during the week of the Permian Basin International Oil Show. But this year, as was the case with most major events, the oil show was canceled, adding to the “double whammy” hotels were already facing from the pandemic and lower oil prices.

That combination has led to hotels in the Permian Basin faring “substantially worse” than hotels across Texas, where there’s been a statewide revenue drop of 64 percent, according to Keith Dial, partner and regional sales director at the DoubleTree by Hilton Hotel Midland Plaza.

By the time the oil show’s executive committee announced in July that the show would be postponed until October 2021, hotels had already been suffering from four months of cancellations and losses. News of another cancellation didn’t come as a shock, Dial said.

But while the oil show is one of the biggest events of the year for hotels, Dial said it doesn’t usually make or break the entire year in the way many people think.

“In a boom year, it’s kind of like just a flutter, because we’re busy all the time in a boom year,” he said. “But in a year like this, it would have substantially helped in the month of October.”

Hotels earn about a third more revenue during the week of the oil show compared to the rest of the year, according to Dial. However, what has hurt hotels in Midland more than the cancellation of any one large event is the cancellation of conferences, weddings and other smaller events that has been occurring since March, he said.

And more than any events being canceled, what has devastated Midland’s hotel industry is the loss of the “Monday through Thursday” crowd who fly in from Houston, Dallas or other energy centers to work in Midland for a couple days.

“Everyone’s bread and butter is that day-to-day — one or two nights or three nights from an individual or company business that comes in very steadily over the course of a year,” Dial said. “That’s where you survive in this economy.”

Dial said events such as the oil show are “gravy” on top of steady bookings throughout the year during a good year, and that stability is what’s missing as oil prices remain low and less activity in the oil field translates to fewer people traveling for work.

He estimated that about a third of the staff at the Midland DoubleTree has been furloughed, and those who have returned to work have reduced hours because there’s not enough to do.

“We’d love to see them back being able to work full-time and take care of their families, and hopefully, we’ll get there,” he said. “I really hope we get there before the end of the year but you’ve just got to look at that realistically, and it doesn’t look like that – not until this vaccine comes along and gets some distribution and people start traveling again.”

Dial

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