Geopolitics of Energy

In April, oil prices strongly increased in the wake of the OPEC/non-OPEC deal cuts. Certainly, the rebalancing of the oil market is close to be achieved
Geopolitics of Energy
21 May 10:16 2018 Print This Article

In April, oil prices strongly increased in the wake of the OPEC/non-OPEC deal cuts. Especially, according to the International Energy Agency data, OPEC’s compliance reached a record of 164% in March compared with a revised (on the rise) 148% in February, while compliance for the 10 non-OPEC nations in the agreement rose to 85% last month from a revised 78% in February.

Brent North Sea quality opened the transactions at $68.18/b and closed at $74.70/b, whereas West Texas Intermediate grade started the negotiations at $63.62/b, closing at $68.45/b.

 

At the time of writing, Brent was trading at $76.50/b – the highest in 3 years – and WTI at $70.50/b, due to the withdrawal of the United States of America from the Iranian nuclear deal.

On April 6th, both the European and Asian benchmark and the American reference touched their monthly low, respectively pricing $66.89/b and $61.63/b, due to the dollar appreciation (1.2234 €/$).

On April 23rd, both blends reached their monthly high, Brent quoting $75.04/b – the maximum in four years – and WTI trading at $68.90/b – record high since December 2014 – after Iranian-backed Houthis in Yemen launched unsuccessful missile attacks against Saudi Arabia, while kingdom-led forces killed a senior leader of the so-called rebel group. At the same time, the global benchmark crude traded at a $6.14/b premium to June WTI, the widest since January 2018.

In April, the oil market was characterized, as both bullish and bearish factors.

 

Among the latter:

1.   Based on the Energy Information Administration data, the U.S. oil output exceed 10,500,000 b/d (weekly figures);
2.   In accordance with the EIA estimates, the U.S. crude oil stocks unexpectedly increased from 425,332,000 barrels on March 30th, to 429,737,000 barrels on April 20th;
3.   The dollar appreciated. In particular, over the euro, the green banknote opened at 1.2308 €/$ on April 3rdand closed at 1.2079 €/$ on April 30th (the maximum appreciation being 1.2070 €/$ on April 27th). At the same time, due to the latest U.S. sanctions imposed on Russia, the dollar appreciated over the rouble too, moving from 57.59 rouble/$ to 62.88 rouble/$ (the maximum appreciation being 64.60 rouble/$ on April 11th). However, this situation helped to boost the country’s budget with an extra 232,000,000,000 rubles ($3,800,000,000).

 

With regard to the bullish factors, which overshadowed the bearish ones in determining barrel price trends, we put into light the following:

1.   At the moment, oil inventories in OCSE nations are just 30,000,000 barrels above their five-year average. There were more than 300,000,000 barrels above the level when OPEC and non OPEC producers started their cuts, on January 1st 2017.

The total amount of OCSE petroleum inventories decreased to 2,841,000,000 barrels;

 

2.   The concerns about a possible trade war between the United States of America and China;

3.   The double U.S. attack over Syria occurred on April 14th and 30th;

4.   The tensions about the Iran nuclear talks after the meeting between the U.S. President, Donald Trump, and French President, Emmanuel Macron, on April 24th.

 

“The oil markets are very much linked to geopolitical tensions, especially if they’re in the Middle East, the heart of global oil exports”, Fatih Birol, the executive director of the IEA, said on Bloomberg television. “If tensions continue, they will continue to have an impact on the oil market and prices. Definitely, this will be a reason to push the prices up”.

Certainly, the rebalancing of the oil market is close to be achieved. However, as we anticipated in the February monthly report, OPEC’s real problem is whether it can ever adequately count inventories outside the developed OECD countries, as these countries already use over half of the oil consumed worldwide and are expected to account for 80% of the demand growth in 2018.

 

Latest data and estimates on oil & gas
 

According to the data published by the Oil Market Report on April 13th, global oil supply decreased by 120,000 b/d in March, to 97,800,000 b/d, after OPEC and non-OPEC producers deepened their cuts to 2,400,000 b/d. In particular, OPEC crude extractions lowered by 200,000 b/d in March, to 31,830,000 b/d, due to further declines in Venezuela and lower output in African producers.

Global Oil demand is estimated to grow by 1,500,000 b/d in 2018 (as forecasted in last month’s report).

Based on the Drilling Productivity Report figures published by the Energy Information Administration on April 16th, the American unconventional output is expected to increase by 125,000 b/d to 6,996,000 b/d in May.

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 10,619,000 b/d, which was reached on April 27th2018 (weekly forecasts).

Thanks to the data provided by Baker Hughes on April 27th, the 1,021 current U.S. active rigs, of which 825 (80.8%, the maximum since August 4th) are oil rigs and 195 (19.1%) are gas rigs plus 1 miscellaneous (0.1%), were 28 more in comparison with the figures published on March 29th, due to the increase in barrel prices.

However, we have to take into account that for some frackers a financial issue is probably looming, because, on April 25th, the 10-year U.S. Treasury yield rose above 3% for the first time since January 2014 and the Federal Reserve intends to raise the interest rates in the next months.

In February 2018, the U.S. crude oil imports decreased to 7,493,000 b/d. They were 8,012,000 b/d in January. The 2017 U.S. average crude oil imports of 7,912,000 b/d are 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.

According to the Chinese General Administration of Customs, in March, China imported 9,220,000 b/d of crude oil, that is 10% more than in February and the second record ever (the first being 9,570,000 b/d in January 2018).

 

Geopolitics of Oil & Gas
The desirable peace treaty that is being negotiated between North and South Korea is also the result of the Sino-Russian political and diplomatic cooperation that has been carrying on since the start of Vladimir Putin’s Presidency on December 31st 1999 and has been strengthening since the nominee of Xi Jinping as Chinese President, on March 14th 2013.

Certainly, as we anticipated in WE-World Energy 37, following Trump and Xi’s meeting on November 8th 2017, the announcement made by the Chinese Ministry of Commerce that China would remove the restrictions on majority holdings in financial, venture capital and insurance companies and that from now on, foreign companies will be able to hold up to 51%, was the economic key stone of the possible deal. In fact, the U.S. economy will be granted access to the massive savings of China, albeit under the control and direction of the Communist Chinese Party.

In the energy sector, despite the fact that CEFC China Energy – owned by state-controlled Huarong Asset Management through a stake of 36,2% – wasn’t able to acquire a 14.16% of Rosneft’s shares from Glencoreand the Qatar Investment Authority (QIA) for the amount of $9,100,000,000, a new example of strategic cooperation between the two Eurasian nations is emerging.

Taking into account that the 2017 contract inked by Rosneft and CEFC Energy on crude oil deliveries – according to which, the Russian oil company will supply CEFC with 60.800.000 oil tons annually till 2023 – is still in place.

Sibur, the largest petrochemicals firm in Russia, will construct a new plant in Russia’s Far East with the aim of targeting the Chinese market. “The Russian petrochemical industry is moving east and Russian energy is moving east. It is moving close to the Chinese border. This is where the energy goes and we follow it”, Dmitry Konov, chairman of the company’s board, stated to the Financial Times on March 19th. Sibur’s main partner is Chinese petrochemicals firm Sinopec, which paid $1,300,000,000 for a 10% stake in the Russian company in 2015.

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Demostenes Floros
Demostenes Floros

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