All the Factors behind the Bullish Trend

The main reasons for the rise in oil prices are the collapse of Lybia's and Venezuela's output along with the economic measures imposed against Iranian crude exports. Looking at country data, China and India are still the key drivers
All the Factors behind the Bullish Trend
22 October 10:03 2018 Print This Article

In September, barrel prices significantly rose at around $4/b. In particular, Brent North Sea oil quality started the negotiation at $78.01/b and closed at $82.75/b, while West Texas Intermediate opened the transaction at $69.64/b, closing at $73.43/b. At the time of writing, Brent was quoting at $84.91/$ and WTI at $74.80/b.

During the first week, both oil benchmarks touched their monthly low respectively, pricing at $76.71/b on September 6th and at $67.45/b on September 7th due to signs that the global market was comfortably supplied despite deepening losses in Venezuela and Iran. Then, oil prices marked a bullish trend, because of the following issues:

1. According to the Energy Information Administration data, U.S. commercial stocks decreased from 401,490,000 on August 31st, to 394,137,000 on September 14th, the lowest since February 2015;

2. After having hit a new record high at around 11,100,000 b/d, the U.S. unconventional oil output is forecast to stop increasing. The EIA slashed the estimates for the 2018/19 production growth;

3. The U.S. sanctions imposed to Iran in May 2018, which are still decreasing the Iranian oil exports, despite the fact that they will not come into force until November 4th.

In the wake of the OPEC + meeting held in Algiers on September 22nd/23rd, the European and Asian benchmark and the American grade reached their 4-year high on September 28th because the OPEC + group – led by Saudi Arabia and Russia – decided not to increase oil supply without paying any attention to the U.S. President numerous suggestions to do so.

Furthermore, the repeated threats made by Donald Trump towards Iran during his speech at the United Nation General Assembly on September 25th spurred a jump in the barrel price as well.

 

Latest data and estimates on oil & gas
According to the data estimated by the International Energy Agency and published by the Oil Market Reporton September 13th, global oil supplies reached 100,000,000 b/d in August. At the same time, the OPEC crude output increased to a nine-month record high of 32,630,000 b/d. OECD commercial stocks enlarged by 7,900,000 barrels in July to 2,824,000,000 barrels.

The global oil demand is forecast to rise by 1,400,000 b/d in 2018, of which 910,000 b/d will be from China and India.

Based on the Drilling Productivity Report data published by the Energy Information Administration[1] on September 17th, the American unconventional output is expected to increase by 79,000 b/d to 7,594,000 b/d in October.

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 11,100,000 b/d, which was reached on September 21st 2018. This output level was maintained during the rest of the month[2] (weekly forecasts).

Thanks to the figures provided by Baker Hughes on October 5th, the 1,052 current U.S. active rigs, of which 861 (81.8%) are oilrigs and 189 (18%) are gas rigs plus 2 miscellaneous (0.2%), were 4 more in comparison with the data published on August 31st, due to the rise in oil prices. However, in the Permian basin, an area between Mexico and New Mexico, which produces 3,400,000 b/d, fracking growth is slowdowning.

In July, U.S. crude oil imports decreased to 7,923,000 b/d. They were 8,480,000 b/d in June (monthly record high in 2018), 7,825,000 b/d in May, 8,244,000 b/d in April, 7,616,000 b/d in March, 7,493,000 b/d in February and 8,012,000 b/d in January. Currently, the 2018 U.S. crude oil imports average stands at 7,942,000 b/d. It was 7,912,000 b/d in 2017, slightly higher than the 7,850,000 b/d marked during 2016, which is on the rise if compared with the 7,344,000 b/d imported in 2014 and the 7,363,000 b/d in 2015.

 

Geopolitics of Oil & Gas
Andy Lipow, President of the Lipow Oil Associates, stated that “President Trump is worried that higher gas prices will impact consumer spending [for example, U.S. gasoline prices] and that this would result in a slowdown of the USA economy. High energy prices are a concern for the administration going into the midterm elections”.

Who is to blame for this situation? Taking into account that Saudi Arabia extracted 10,700,000 b/d in September (+700,000 b/d since June 2018) and the Russian Federation hit its new post Soviet record high, reaching 11,347,000 b/d (+400,000 b/d since June 2018), the OPEC + group is therefore the only responsible for the bullish oil price trend?

Firstly, the drop in the Libian output, which was 1,600,000 b/d during the Mu’ammar Gheddafi’s era and is now less than 800,000 b/d, is entirely the fault of the previous U.S. Administration.

Secondly, the fall in the Venezuelan production is the consequence of, both internal political issues, and sanctions, which were imposed during Obama’s Administration, but were reinforced by the Trump’s Administration.

Thirdly, the economic measures, which have been put in place last May by the U.S. government over the Iranian oil exports, have been certainly contributing to the destabilization of the oil market too. “If he [Trump]wants the price of oil not to go up and the market not to get destabilized, he should stop unwarranted and disruptive interference in the Middle East and not be an obstacle to the production and export of Iran’s oil”, said Tehran’s oil minister, Bijan Zanganeh, on September 26th.

Before making any additional decisions on supply, OPEC + group will certainly analize global oil demand estimates in the next weeks, as explained by Russian Energy Minister, Alexander Novak, who also noted that the market may be “in a small deficit, but overall stable”. As it is perfectly well known, China is the main world energy demand driver and the current commercial war that the United States of America has sparked towards the Asian economic super power could potentially hurt international economy thus, future global oil demand too (on October 12th, the IEA cut its estimate for global oil-demand growth for both 2018 and 2019 by about 110,000 b/d to 1,300,000 b/d and 1,400,000 b/d respectively).

In fact, China has completely stopped buying U.S. crude as tensions between the two countries are still continuing to rise. “We are one of the major carriers for crude oil from the US to China. Before [the trade war]we had a nice business, but now it’s totally stopped”, said Xie Chunlin, President of CMES (China Merchants Energy Shipping Co), during the Global Maritime Forum’s Annual Summit in Hong Kong, on October 3rd.

Prevoiusly, on September 18th, the Chinese government stated that it will furthermore impose a 10% duty on U.S. LNG imports.

As pointed out by Bloomberg on September 27th, when former U.S. President, Barack Obama, first imposed sanctions on Russia in 2014 – easing the Iranian ones parallely – a plunge in global crude prices turned the penalties into a crushing blow. This time round, oil markets are doing the opposite. In particular, Russian oil & gas companies are increasing their revenues and shrinking debts not only as a consequence of high barrel prices and record output, but also because a weaker ruble over the dollar.

Despite the fact that the Russian Central Bank increased the interest rate by 25 basis points, bringing it from 7.25% to 7.50% on September 13th, the ruble-traded MOEX index reached 2,493.82 points, an all-time record high, on October 1st due to another jump in oil prices.

To conclude, if Trump has to blame the guy in the mirror, Putin has to turn wink at the mirror.

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Demostenes Floros
Demostenes Floros

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