A market awaiting developments

The downward trend in oil prices seen in recent months reflects the development of shale in the United States, a evolving situation within the sector that for the time being is not a source of concern to OPEC countries, which are currently engaged in complying with the agreed output cuts
A market awaiting developments
19 March 10:19 2018 Print This Article

In February, oil prices strongly decreased by approximately $5/b. In particular, on February 1st, North Sea Brent and West Texas Intermediate quoted at $69.75/b and at $66.01/b respectively. On February 28th, the European and Asian benchmark priced at $64.66/b, while the American blend traded at $61.55/b. At the time of writing, Brent was quoting at $63.78/b and WTI at $60.25/b.

On February 13th, both qualities reached their monthly low, Brent listing at $62.60/b and WTI at $58.87/b. This bearish trend was the consequence of the following economic and financial factors:

1. In the week ending on January 30th, the short net speculative positions (selling) increased by 6.3%, corresponding to 39,127 more contracts;

2. During the first week of February, the total number of U.S. active rigs grew by 29 facilities;

3. On February 8th, the dollar appreciated over the euro, quoting at 1.2253 €/$;

4. On February 9th, the U.S. output surged to 10,271,000 b/d. International Energy Agency Executive Director, Fatih Birol, said “explosive growth” in U.S. oil output might extend beyond this year.

During the second part of the month, prices rose because of:

1. A weaker greenback. On February 15th, the euro/dollar exchange rate was at 1.2493 €/$, which boosted the appeal of the commodities priced in the U.S. currency;

2. The drop in OCSE countries oil inventories;

3. The increase in the American oil exports, which reached approximately, 2,000,000 b/d, was the highest since October 2017;

4. On February 23rd, the production at Libya’s El-Feel well halted (-70,000 b/d) after protests disrupted its production.

At the end of the month, both a new appreciation of the dollar, which reached its monthly maximum over the euro (1.2214 €/$ on February 28th), and a rise in the U.S stocks (+3,020,000 barrels during the next week) supported a drop in prices.

On February 12th, United Arab Emirates Energy Minister, Suhail Al Mazrouei, currently the president of OPEC, said, “Shale is coming and the expectation is that it will come stronger than in 2017, and this is something that we have to watch. But considering all factors, I don’t think it will be a huge distorter of the market”.

As envisaged by Bloomberg on February 18th, 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.

Probably, for this reason Saudis Oil Minister, Khalid A. Al-Falih, stated on February 19th, “If we have to overbalance the market a little bit, then so be it”.

Latest data and estimates on oil & gas

According to the data provided by the Oil Market Report published by the Energy Information Administrationon February 13th, the global oil supply in January lightly decreased to 97,700,000 b/d, but was 1,500,000 b/d above last year. In particular, OPEC crude oil output was steady in comparison to the previous month at 32,160,000 b/d. Non-OPEC extractions fell by 175,000 b/d in January, to 58,600,000 b/d that was 1,300,000 b/d higher than a year ago. OECD commercial stocks dropped in December by 55,600,000 barrels, the strongest fall since February 2011, reaching 2, 851,000,000 barrels.

Global oil demand forecast for the current year has been slightly rising to 1,400,000 b/d, due to the positive world GDP estimates issued by the International Monetary Fund.

Based on the Drilling Productivity Report figures published by the Energy Information Administration on February 12th, the American unconventional output is expected to increase by 110,000 b/d to 6,756,000 b/d in March.

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 10,369,000 b/d, which was reached on March 2nd2018 (weekly forecasts).

In accordance with the data provided by Baker Hughes on March 2nd, the 981 current U.S. active rigs, of which 765 (81.5%, the maximum since August 4th) are oil rigs and 181 (18.5%) are gas rigs, were 35 more in comparison with the data published on February 2nd due to oil prices being steadily above $60/b.

In December 2017, the U.S. crude oil imports marginally increased to 7,782,000 b/d. They were 7,623,000 b/d in November. The 2017 U.S. average crude oil imports of 7,910,000 b/d are slightly 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 the 7,363,000 b/d in 2015.

In 2017, Chinese’s average oil imports reached the historic record of 8,420,000 b/d, while the first month of 2018 marked a peak of 9,610,000 b/d.

Geopolitics of Oil & Natural Gas

In our previous oil monthly survey, an interview released by Francesco Sisci on January 29th was reported. The former Italian and NATO General brought into light that the article published by the Economist – The next war– was objective because it gave a detailed account of the military preparations for a probable rather than possible war, firstly against China and secondly against Russia. It provided objective facts in need of interpretation. F. Sisci read them as a semi-official announcement of the beginning of the Second Cold War. Moreover, the General underlined that Bruxelles and Washington will ostracize the Italian parties, which today are against the European Union, and that the United States of America and the EU will support whoever assume a pro-European and an anti-Russian political position.

Looking at the Italian political elections, Angelo Panebianco, an intellectual who represents the euro-Atlantic interests of the Italian high bourgeois class, wrote an editorial publishd by the Corriere della Sera – La posta in gioco per il Paese – on February 18th, putting into light that “A further crucial common element between then [the 1948 elections] and now is that the country finds itself in terms of its international positioning. There could be some attempts (clearly difficult to actualize) to loosen European ties in a bid to reclaim sovereignty. A close relationship with Russia might gradually supplant its relationship with the United States.”

“Given that the most pro-European political forces were defeated in the March 4 elections, can we expect political relations between the Russian Federation and Italy to become even stronger in the near future?”

Considering that the Movimento 5 Stelle and Lega are the clear winners of the Italian political elections carried out on March 4th, is it possible that the political relationship between Italy and the Russian Federation will strengthen?

From a strictly energy point of view, the Russian Federation is the first natural gas and the fourth oil supplier of Italy.

In particular, based on the data published by the Italian Ministry of the Economic Development, in 2017, Italy consumed 75.151 Gmc3 of natural gas  (+6% y-o-y, calorific power 38.10 MJ/mc), of which 30.180 Gmc3 (+6.8% y-o-y) supplied by the Russian Federation (40.16% of the total amount). In 2016, the consumptions were 70.914 Gmc3, of which 28.267 Gmc3 provided by Russia (39.86%).

In accordance with the figures reported by Unione Petrolifera, Italy consumed 66,387,000 tons of oil in 2017, of which 6,539,000 tons – equal to 9.8% of the total consumptions (+ 1.5% y-o-y) – are Russian supplies. At the same time, Italy imported 12,386,000 tons of oil from Azerbaijan, 9,324,000 tons from Iran and 8,568,000 tons from Iraq.

Since the start of the OPEC-Russia production cut deal (beginning 2017), Russia’s oil companies and government have received the equivalent of around $41,500,000,000 more in proceeds due to the higher oil prices ($29,410,000,000 the government and $12,090,000,000 the oil companies).

It is up to Italy to give a signal.

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Demostenes Floros
Demostenes Floros

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