A hot summer for oil

Aug 28, 2017 11:45 am

On the one hand, there is progress, albeit slight, on crude oil prices and the strengthening of the euro against the U.S. dollar; on the other, there is America’s new sanctions strategy to curtail Russian exports

In July, oil prices increased. In particular, Brent North Sea quality opened at $49.58/b and closed at $52.68/b, while West Texas Intermediate opened at $47.19/b and closed at $50.20/b. At the time of writing, Brent crude was trading at $51.74/b, while WTI was quoting at $48.94/b.

On July 7th, both the European and Asian benchmark and the American reference reached their monthly low, respectively pricing at $47.00/b and at $44.47/b as official data showed that U.S. drillers boosted production by 1% during the last week of June. In fact, after the U.S. oil extractions temporarily diminishing by 100,000 b/d to 9,250,000 b/d, they reached again 9,338,000 b/d.
Subsequently, barrel prices started to rise and, on June 19th, Brent traded at $49.70/b while WTI at $47.31/b. Three reasons can explain this bullish trend:

– 1 On June 13th, according to the data provided by the Energy Information Administration, U.S. refineries worked at 94.5% of their maximum capacity and the American crude stocks decreased by 7,600,000 b/d, the highest fall since September 2016. Simultaneously, U.S. gasoline inventories dropped by 1,600,000 b/d;
– 2 The dollar depreciated, both over the euro, and towards a basket of global currencies;
– 3 In the II quarter of 2017, China’s real Gross Domestic Product grew by 6.9% in comparison with the same period of 2016. This positive tendency was faster than expected and in line with the I quarter’s growth. The Chinese government is aiming to rise its GDP to around 6.5% in 2017.

After a new slight fall in barrel prices of approximately $2/b – probably, reconnected to the speculation – verified within 19th/21th of July, oil prices increased during the last week of the month in the wake of the decisions taken during the St. Petersburg meeting on July 24th. In particular:

– 1 Saudi Arabia decided to cut its oil exports to 6,600,000 in August, 1,000,000 b/d less in comparison with the same period of 2016, while United Arab Emirates will slash their September oil deliveries by 10%;
– 2 Nigeria, which is exempted by the 2016 November agreement, promised to collaborate with the cuts decided by the other OPEC Member as soon as it reaches the output of 1,800,000 b/d. At the moment, Nigeria’s production is slightly below this level;
– 3 By common consent, the Russian Energy Minister, Aleksander Novak, and his Saudi colleague, Khalid al-Falih, expressed their support to an eventual extension of the 2016 November agreement. At the moment, the deal will end on March 31st 2018;
– 4 The increase in U.S. oil and gas rigs is slowing down while U.S. inventories are showing massive drawdowns (10% less from their March peaks).

Rising prices and strengthening euro

If the price of Brent – returned to backwardation at the end of the month – will it continue in the next weeks and contribute to opening a new scenario for OPEC and non-OPEC producers?
In July, the €/$ exchange rate opened at 1.1369 €/$ and closed at 1.1727 €/$. At the time of writing, the €/$ exchange rate is trading at 1.1802 €/$. The green banknote reached its low since December 2014 over the European currency at 1.1893 €/$ on August 2nd because of:
Despite the fact that the United States created 220,000 new jobs in June, the U.S. unemployment rate increased from 4.3% to 4.4%;
Taking also into account that the U.S. consumptions approximately represent the 70% of the U.S. GDP, it is not such positive news that hourly salaries rose by a modest 0.2% in June in comparison with the previous month, after the increasing of 0.1% in May. Year over year, U.S. salaries have raised by 2.5%; the increase had been 3% before the 2008 crisis;
At the same time, the U.S. labour participation rate increased from 62.7% to 62.8%. All the same, it has been at its lowest for decades;
Based on the World Economic Outlook published by the International Monetary Fund on July 24th, “La ripresa resta sulla buona strada, ma permangono rischi al ribasso nel medio termine per l’economia globale. Il downgrade più grande riguarda gli USA con un taglio delle stime sul tasso di crescita dello 0,2% per il 2017 e dello 0,4% per il 2018 perché nel breve termine le politiche del Presidente Trump “saranno meno espansive del previsto”.

According to economist Guido Salerno Aletta, the strengthening of the euro reflects the fears that Trump’s Administration will not be able to maintain the promises made during the electoral campaign, cutting taxes and increasing public investments. Furthermore, the very probable winning of the current German Chancellor, Angela Merkel, in next winter’s political election, will put an immense pressure on the ending of the quantitative easing monetary policy into the Eurozone.

On the other side of the Atlantic, Pimco’s advisor, Johakim Fels, explained the weakiness of the dollar with “la sola minaccia di mettere dei dazi ha spinto a più miti consigli le banche centrali europee e asiatiche. Meglio confrontarsi con il mini-dollaro che col protezionismo”.

Latest data and estimates on oil & gas

According to the data provided by the Oil Market Report, published by the Energy Information Administration on July 13th global oil supply increased by 720,000 b/d in June, reaching 97,460,000 b/d as, both OPEC, and non-OPEC increased their outputs.

In particular, OPEC crude production rose by 340,000 b/d to 32,600,000 b/d because Libya and Nigeria have been increasing their extractions (+700.000 b/d their combined outputs in the last two months) along with Saudi Arabia too. The consequence was that OPEC compliance with the 2016 November agreement decreased from 96% marked in May to 78% while non-OPEC extractors compliance rose to 82%.

Possibly for this reason, on July 12th, the Nigerian oil minister, Emmanuel Kachikwu, made clear that, “As a serious member of OPEC, we stand ready to support the cuts when we are sure that we can have a stable, predictable production. We still are below the 1.8 million barrel a day benchmark set for us by OPEC. I think that over the next one or two months, hopefully, we can get to that point where we can say the recovery has been tested, it is systemic and predictable”.

Global demand is foreseen to grow by 1,400,000 b/d in 2017 to 98,000,000 b/d, 100.000 b/d more than the previous estimate.

Based on the figures of the Drilling Productivity Report published by the Energy Information Administration on July 17th, the American unconventional output is expected to increase by 113,000 b/d to 5,585,000 b/d in August. The U.S. crude production, after the peak of 9,627,000 b/d gained in April 2015, decreased to its lowest of 8,428,000 b/d on July 1st 2016. It then started increasing to 9,430,000 b/d, which was reached on July 28th 2017.

According to the data provided by Baker Hughes, the total current number of U.S. active rigs – 954 of which, 765 (80.2%) are oil rigs and 189 (19.8%) are gas rigs, on August  4th – have been slightly restarting to rise again after the first drop in U.S. drilling activity since January 2017 happened on June 30th.

Crude oil exports to the U.S. on the rise

Despite the fact that the U.S. unconventional production has risen since October 2016, Dave Lesar, Executive Director of Halliburton, confirmed in mid-July that some clouds – dealing with the financial and extraction fracking costs – were looming on the horizon as we had anticipated in the previous monthly report.

In May 2017, the U.S. crude oil imports increased at 8,397,000 b/d. They were 8,131,000 in April, 8,048,000 b/d in March, 7,890,000 b/d in February and 8,435,000 b/d in January (record since August 2012). Now, the current 2017 U.S. average crude oil imports of 8,180,200 b/d are clearly higher than the 7,877,000 b/d marked during 2016, which is on the rise if compared with the 7,344,000 b/d imported in 2014 and 7,363,000 b/d in 2015.

In addition – unlike in June – the impression is that the market has been paying attention not only to U.S. inventories – which are one of the most important data that the market currently seems to analyse in order to determine oil price trends – and to the U.S. oil exports, also to the U.S. oil imports too.

Geopolitics of Oil & Natural Gas

On July 25th, the United States House of Representatives banned both U.S. citizens and enterprises to supply Russian companies with goods, services or technology for the offshore in the Artic and for project reconnected to the fracking. This vote sparked a lot of criticism from both sides of the Atlantic, because it could shut down oil and gas projects around the world that involved Russian partners with American and in particular, European enterprises.

Previously, on July 18th, Jack Gerard, President of the American Petroleum Institute, despite expressing his support in favour of the sanction extension, urged the House of Representatives to “make critical modifications to avoid these unintended consequences”. Simultaneously Leslie Beyer, President of the U.S. Petroleum Equipment & Services Association, stated that the move would cause “job losses and economic contraction in American communities”.

Exxon has given to the legislators informations about how the bill could “disadvantage US companies compared to our non-US counterparts”. For example, the Russian oil company Rosneft has a stake in Exxon’s international projects, including those in the Permian basin in New Mexico, and Alberta province in Canada.

With regard to the European and Russian energy relations, Volker Treier, chief economist at the German Chambers of Commerce and Industry said, “The European Commission now must make efforts to shed light on the current situation, as well as resist the exterritorial effect of new US penalties. We get the impression the US pursues their own economic interests. If German firms are banned from participating in gas pipeline enterprises, very important projects in the energy supply security sector can be halted. In that case, the German economy will be discernibly influenced”.

Even so, on August 3rd, the European Commission has decided to broaden sanctions against Moscow.

Action against Russian exports

The most important project that the U.S. measures aim at hitting is the Nord Stream II gas pipeline but, at the same time, sanctions could slow down the construction of the European Gas Southern Corridor, which will supply the EU with the Azeri natural gas, and the energy plans in the southeastern part of the Mediterranean Sea.

In this case, Italy must take into account that Eni, which discovered the offshore giant gas field of Zhor in 2015, sold to Rosneft a 30% stake in the Shorouk concession in December 2016 that can potentially increase to 35%, overcoming the threshold of 33% of a Russian investment involved in a partnership project after which sanctions must be applied.

On August 2nd, the U.S. Senate passed the same bill too. President Trump will probably ratify a low that – even though it will hit Germany’s interests – it is in open contrast with his foreign policy strategy aiming at resetting the serious diplomatic tensions with the Russian Federation.

To conclude, is it so sure that the European elites will finally decide to carry on its political agenda independent from the United States or is the suspicion true that “such boldness is calculated, instrumental” and especially against Trump’s Administration as it already seemed emerging the following day of the G7 in Taormina?

Demostenes Floros

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