Movements towards the southeast

While oil prices continue their - mainly downward - daily swings, the difficult relations between Turkey and Russia affect the gas markets and cast doubt on major infrastructure projects
Movements towards the southeast
19 January 17:03 2016 Print This Article

In November, the price of the BRENT opened at $49.61/b and closed at $44.57/b, while the WTI opened at $46.99/b and closed at $41.71/b.
Both oil qualities reached their monthly high on November 3rd – respectively, at around $51.02/b and $48.56/b – due to the drop in the US tight oil and shale gas production. In addition that the US light tight oil (LTO) is estimated to decline by 0.6 million b/d in 2016. Afterwards, in mid-November, the price of the barrel constantly decreased and then remained steady except for a temporary rise at around 3% in the aftermath of the Russian military jet downing by the Turkish on 24th of November.

BLACK GOLD STILL DOWN
The fall in oil prices has to do with two specific issues:

the first deals with the so-called fundamentals. According to the data provided by the Energy Information Administration on November 13th, global demand growth is forecast to slow to 1.2 million b/d in 2016 after surging to a five-year high of 1.8 million b/d in 2015. Global oil supplies breached 97 million b/d in October, as non-OPEC output recovered from lower levels the previous month. At the same time, stocks have reached their record high since last ten years. Currently, in the market, there is still an over production of approximately 2 million b/d. In 2016, despite the resilience of producers such as the Russian Federation, non-OPEC supply is forecast to shrink by more than 0.6 million b/d. If so, it would be the first drop since 2009.
secondly, the trend of the €/$ exchange rate. In particular, during November the dollar steadily appreciated over the euro. After having opened the month at around 1.10 €/$, the US greenback has reached its maximum over the European currency since April 2015, at around 1.05 €/$.

The strength of the dollar is also causing some problems to the economies of some countries such as the Gulf States and in particular, Saudi Arabia, which have a monetary peg with the US currency because of the excessive contemporary appreciation of their national currencies.

Last autumn, the fall in oil prices can be attributed to three simultaneous factors:

The global market oversupply calculated at around 1.5/2 million b/d;
The Federal Reserve interrupted its third programme of quantitative easing in July 2014;
The geopolitical reasons, in particular, the aggressive energy policy adopted by the Saudis.

With regard to the explanation of the latter factor, I have suggested three options that are not necessarily conflicting:

The first aim of Saudi Arabia was to attack the Iranian budget, already struggling due to the sanctions.
The second purpose was – and still is – causing troubles for the unconventional North American oil production. At the same time, I highlighted that the data regarding the output of the US unconventional were overestimated so they have in part contributed to the fall in prices.
Finally, we cannot exclude that there was also a common interest between Saudi Arabia and the United States.

In fact, the American establishment that knew very well the structural limits of its unconventional production, in particular the fast exploitation of a well and the need of, both high funding, and high sell prices, was aware that the US tight and shale peak was looming. Conscious of these limits, the United States, which clashed with the Russian Federation in Ukraine, Venezuela and Ecuador in Latin America during that period, might have given a sort of “green light‘ to the Saudis, to whom they also sold military equipment for an amount of $100 billion in the past 5 years ($12 billion during the last few months).

THE RUSSIAN-TURKISH DISPUTE AND THE CONSEQUENCES ON GAS MARKET
On October 15th 2015, Rosneft CEO, Igor Sechin, with regard to the European oil market, said that Saudi Arabia is reducing prices to reach new markets: “In terms of competition, we are seeing now that Saudi Arabia has even come on the Polish market, where it has never been; it’s supplying raw materials through Gdansk. Actively dumping‘.  Maybe, Saudi Arabia, which is losing share oil market in China to the Russian Federation detriment, is also trying to punish Vladimir Putin’s government for supporting Syrian President Bashar al-Assad, who is an enemy of the petrodollar Kingdom but an Iranian ally, and for the Russian air strikes on rebel groups? On November 24th 2015, Turkey shot down a Russian military jet. After the end of the war in Korea in 1953, a similar episode has never happened between the Atlantic Pact and the former Warsaw Pact. The crisis broken out between the two countries has to due with energy too. In 2014, Turkey’s primary energy consumption amounted to 125.3 Mtoe. This is the Turkish energy mix:
Natural Gas 35%;
Coal 29%;
Oil 27%;
Hydroelectric 7%;
Renewables 2%.
Therefore, the “Blue Gold‘ is the main source used.

According to the data provided by SicurezzaEnergetica.it, Turkey consumed 52.4 Gmc3 of natural gas in 2014.

Turkish gas suppliers are:
The Russian Federation 55% (28.8 Gmc3);
Iran 18% (9.6 Gmc3);
Azerbaijan 11% (5.7 Gmc3);
Algeria, Nigeria, Qatar, Norway and Egypt export LNG to Turkey. Liquefied Natural Gas 15% (7.8 Gmc3 approximately, 50% of the total regasification capacity);
Domestic Production 1% (0.5 Gmc3).

In addition to the Oxford Institute for Energy Studies pointed out that Turkey will need to increase its natural gas demand by nearly 22 Gmc3 from 2014 to 2023. Iran cannot substitute the Russian gas supplies to the European Union and Turkey too due to at least three issues:
It has an increasing domestic demand to satisfy and, at the same time, 13% of the Iranian families who live in rural areas have yet to be connected with the national gas system;
It needs to modernize its energy equipment. To do it, Iran must import new technologies to improve the extraction and the distribution of natural gas;
It is estimated that Iran needs about $100 billion of investments in the gas sector to achieve its goals.

In addition, the recent Azerbaijani issues with regard to the natural gas output and the contextual necessity to respect the export contracts that Azerbaijan has in place, led the country to be supplied by the Russian Federation. This situation raises a number of questions in respect to the Saha Deniz II gas field real production capacity. In fact, the Azeri gas field should supply the Trans Adriatic Pipeline (TAP) in which the landing place will be South Italy (Puglia). Is Turkey sure to do without the Russian Federation?

Demostenes Floros

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Cecilia Valentini
Cecilia Valentini

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