Opinion: Nic Moulis likens the impact of 2020 to waves in the ocean

Recently, a friend in the industry asked me to describe the goings on of 2020 and predict some outcomes for 2021. Rather than a longwinded answer about the fundamentals of the oil industry, I decided to summarise it in an analogy about waves in the ocean.

A wave set is a group of three to 10 large waves that seemingly appear out of nowhere and disappear just as quickly.

What can sometimes happen, is a process of constructive interference, where the crests and troughs of these waves coincide, making new bigger crests or deeper troughs. This was the first half of 2020.

The initial outbreaks of COVID-19 from January 2020 coincided across the globe. With economies around the world closing simultaneously.

The initial trough was deep.

International oil prices fell to the deepest point when WTI was selling at -$USD 37.63 per barrel. In essence, some traders were paying others to take contracts off their hands. Australian price followed suit, with declines of more than 40 per cent in TGP’s between January and April.

Volumes were also affected by travel bans and lockdown orders. April opened with volumes in Australia down 33.16 per cent on pre-COVID-19. This decline was to peak at 79.19 per cent during Eas­ter, when governments of all persuasions pleaded for residents to stay at home.

However, in the back end of 2020, we had a wave phenomenon called destructive interference. Where the crests and troughs of the two waves overlap and the whole thing gets cancelled out due to subtraction. The result is a flat spot in the wave.

With COVID-19 still dominating proceedings, we had a overlap of outbreaks and policy.

In Australia, this was best highlighted by the prolonged lockdowns in Victoria against the relative free living in places like Perth.

Victoria, with its stage four restrictions and hard border closures was the worst hit. Fuel sales were down close to 45 per cent by August, halfway through what would become three months of restrictions.

Sydney and Brisbane plateaued in their fuel volume recovery at levels 10 per cent to 12 per cent below Q3 2019. Adelaide and Perth, relatively free in their movement of citizen’s, were the only cities to just recover to volumes equal to 2019.

So, what of 2021?

Being the eternal optimist, I will hang out well offshore of where the waves are breaking, gazing at the horizon.

There is sufficient evidence and plenty of factors that should point markets higher in 2021.

While demand is a concern in the near term, producers are pumping out vaccines with researchers noting that output could reach 900 million doses per month. That should help demand recover, and by the fourth quarter oil demand is forecast at around 99-million-b/d, about a 4-million-b/d increase from the fourth quarter of 2020.

In Australia, refiners will still struggle with margin. Over the past 10 years, Morgan Stanley research shows an average of the September gasoil crack between $10-19/bbl. Currently, the crack is below $8/bbl. Although refining margins are improving, it is probably too little too late for our local refiners.

With oil prices recovering. Both Morgan Stanley and Goldman see prices at between USD$60 – $65/bbl. Australian retailers will see their underlining TGP’s increase.

The question for retailers, as they post board prices, will be the balance between demand growth and margin. Volumes won’t be as they remember them. Work from home is now firmly part of the employment mix. I also believe, work from anywhere will become a thing. This should promote demand in regional areas as workers, not just retirees, look for tree and sea change.

There is also what looks to be a continued pipeline of service stations being built. Site numbers from OPIS indicate that there are now more than 7000 sites in Australia. This being close to a 10 per cent increase on the three-year average.

Having described all that. What I am waiting for is the next set and the wave of the day. It’s definitely going to be worth it.

This article was written by Nic Moulis for the February / March issue of Convenience & Impulse Retailing Magazine.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top