The game of supply and demand

The increase in oil prices in April, the highest increase in a year, is the result of the reduction in availability on an annual basis, which in 2016 will be less than 700,000 barrels per day. All this despite the failure of negotiations in Doha
The game of supply and demand
16 May 16:00 2016 Print This Article

In April, oil prices significantly increased by around 20%. In particular, Brent opened at $38.69/b and closed at $47.32/b (monthly high, $48.50/b), while WTI opened at $38.14/b and closed at $46.06/b (maximum, $46.78/b). April was the month with the highest increase in one year. In comparison to the beginning of 2016, the upsurge in prices closed at 80%. This bullish trend has steadily characterized the entire month, both before the meeting in Doha on April 17 and after the failure of the oil producers summit, which took place in the capital of Qatar.
Simultaneously, the €/$ exchange rate closed the month around 1.14 €/$, the same price quoted at the beginning of April. The temporary recoveries at 1.12 €/$ showed by the American green bills over the European currency disappeared as a consequence of the expected maintenance of the interest rates at 0.25-0.50% by the Federal Reserve on April 27, after the American economy registered a weak growth in gross domestic product during the first quarter of 2016 (+0.5%).
Due to the increase in oil prices, the ruble appreciated, both over the euro and the dollar respectively, moving from 77.5 ruble/€ to 73.2 ruble/€ and 67.8 ruble/$ to 64.2 ruble/$. Brent crude, which is used as a basis for the price of the country’s main export Urals blend gained 22%, while the Russian ruble gained only 5% against the US dollar.

Latest data and estimates on oil & gas

According to the data provided by the International Energy Agency in its Oil Market Report on April 14, global oil supplies sank by 0.3 million b/d in March to 96.1 million b/d, with annual gains shrinking to 0.2 million b/d. OPEC crude oil production fell by 90 thousand b/d in March to 32.47 million b/d. The supply from Saudi Arabia dipped in March but held close to 10.2 million b/d. The overhang of inventories in the OECD countries widened to 387 million barrels in February.
Based on the figures published by the Energy Information Administration on April 11, US tight oil production is expected to decrease by 114 thousand b/d in May. The total US oil output currently stands at 8.94 million b/d from its peak of 9.7 million b/d in April 2015. US crude oil production averaged an estimated 9.4 million b/d in 2015. The production is forecast to average 8.6 million b/d in 2016 and 8.0 million b/d in 2017. US oil output is estimated to reach 7.9 million b/d in the 3Q2017, 1.8 million b/d less in comparison with the peak (highest since 1971).
In accordance with Baker Hughes data, the number of active US oilrigs decreased to 332, less than  1/4 of the record reached in 2014.
Global oil demand increased from 93.58 million b/d in the 1Q2015 to 95.48 million b/d in the 1Q2016. Growth in global oil demand will ease to around 1.2 million b/d in 2016, below 2015’s 1.8 million b/d expansion.
In conclusion, there is a steady oil demand growth and a falling non-OPEC supply (except for the Russian Federation) in the market. The year by year drop of the latter was estimated at 690 thousand b/d in March and it is forecast at less than 700 thousand b/d in 2016. Taking into account a conservative scenario, the surplus in oil market will fall from 1.5 million b/d in the first half of 2016 to 0.2 million b/d in the second half of this year.

The meeting in Doha

On April 17, the talks by major oil producers to freeze output failed after Saudi Arabia, Qatar and the United Arab Emirates said they would not reach a deal unless Iran was included. In reality, Tehran said before the meeting that it wants to increase its production to pre-sanctions levels of 4 million b/d in order to be able to benefit from the lifting of economic sanctions under the nuclear deal with 6 leading world powers. For this reason, Iran did not send its Energy Minister, Bijan Namdar Zanganeh, to participate in the talks.
Despite this outcome, the price of the barrel raised during the second half of April too. What are the possible explanations of this present trend? Why was it not predicted in the report issued by the US bank, Goldman Sachs?
Here, some suggestions:
1.    Many oil producers – in particular, the Russian Federation – and Saudi Arabia too were still producing at their highest in January 2016 as well as during the first quarter of the current year. In addition, the second-biggest OPEC producer, Iraq, increased crude output to its highest level in the post-Saddam Hussein era from 4.46 million b/d in January to 4.55 million b/d in February. Looking deeper into the data of the first month of this year, the Russian Federation would have had to freeze its output at 10.99 million b/d, which is the record high since the collapse of the Soviet Union, if the oil producers had achieved an agreement in Qatar. At the same time, Saudi Arabia would have had to stabilize its production at 9.95 million b/d;
2.    The financial investments on the rise of the hedge funds (purchase). In reality, the total amount of the long net speculative positions, both over the Brent and WTI are at their record high. The sum of futures and options are equal to 656 million b/d approximately, 7 times more the daily oil global output;
3.    The weakness of the dollar, which is inversely correlated with raw materials;
4.    Increasing demand from China is another factor for bolstering prices. In March, the country’s crude imports rose 22% year on year, reaching 7.7 million b/d;
5.    Last, but certainly not least, some analysts pointed out that the decline in US output could curb the glut in the global market. “It really doesn’t matter what OPEC does. Supply is going to come down because of a drop in US production. US production won’t stop falling unless we get prices around $45 or $50, and at that point it will only stabilize,” Roland Morris, commodities strategist at VanEck, which manages $24.7 billion in assets, told the Wall Street Journal.

Geopolitical assessments

With regard to Saudi Arabia, “the weekend talks are a demonstration that the Saudi government, as the deputy crown prince has clearly stated, doesn’t want to cede market share”, Ed Morse, head of global commodity research at Citigroup told Bloomberg. It seems that the Riyadh’s strategy of maintaining low prices thanks to their lower costs of production in order to overthrow high costs producers and defend their market share, is gaining more ground over tight oil producers rather than Iranian output which, on the contrary, is slightly increasing. On the other side, the Saudis must take into account the political consequences of their looming military defeat in Syria in addition with their political relationship with the United States that is currently at its lowest.
Iran is in the opposite situation. It appears that it is winning the war in Syria but, as we pointed out in our previous report, is unable to boost oil production without foreign investments, which need high and stable prices. In addition, Teheran must take into consideration that, after the nuclear agreement with the United States, the political relationship between the White House and Israel is in a bad shape and the Jewish Country stated that it does not want to leave the Golan high grounds.
According to AP reports, after losing $390 billion in revenue due to is weak crude in 2015, oil-exporting countries in the Middle East could lose from $490 billion to $540 billion this year compared to 2014. Countries heavily dependent on crude like Saudi Arabia will have the biggest budget deficits. Riyadh is trying to diversify its economy, but oil still accounts for 72% of its revenues.
This could be a good reason for both countries to try again to find a reconciliation, which probably needs the joined efforts of the Russian Federation and the United States.
However, the two biggest nuclear world powers have their problems too. In the US, the dream of energy independence with the fracking technique revolution is slowly disappearing. Currently, Barack Obama must firstly face the scandal related to the possible involvement of the Saudis in the 9/11 attacks, but there is good possibility that the next President of the United States will have to implement the US future political strategy in an energy national context that will not be as favorable as during the last decade.
Simoultaneously, the Russian Federation, with an oil production at full speed since the collapse of the Soviet Union, took a sigh of relief thanks to the natural gas data too. In 2015; Gazprom Export exported  158.6 Gmc3 of natural gas (calorific power equal to 37.38 MJ/mc) to Europe and the first 2016 figures seem to be very positive as well. However, the revenues related to natural gas are a little more than 1/4 of those derived by oil and its by-products.
According to the data compiled by Bloomberg, – “the 18 nations set to gather in Doha to discuss a production freeze have spent $315 billion of their foreign – exchange reserves about 1/5 of their total – since the oil slump started in November 2014. In the last 3 months of 2015, reserves fell nearly $54 billion, the largest quarterly drop since the crisis started”. Most of them in Saudi Arabia, Russia, Libya, Iraq, Azerbaijan, Nigeria, Qatar and Venezuela respectively. To conclude, should North American tight oil and shale gas solve, in part, their problems?

Demostenes Floros

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Cecilia Valentini
Cecilia Valentini

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