Markets and policies influence oil
May 15, 2017 9:42 am
The price per barrel continues to fluctuate, conditioned by several factors including foreign and energy policy decisions by the Unites States
In April, oil prices slightly decreased. In particular, Brent North Sea quality opened at $53.09/b and closed at $51.89/b, while West Texas Intermediate opened at $50.25/b and closed at $49.48/b. Both the European and Asian benchmark and the American reference reached their highest on April 11th, respectively pricing $56.29/b and $53.84/b in the wake of the American raid over the Syrian military base of al-Shayrat, near the city of Homs.
Moreover, during the first part of the month, barrel prices also increased because of:
-A supply outage at a field in the United Kingdom’s sector of the North Sea;
-According to oil analysis firm Vortexa, shipped oil supplies have dropped by 17% this year. “We have seen a significant reduction in global oil supply since January, with oil on water going from 978 million barrels on January 1st to 812 million barrels on April 3rd,” said Vortexa chief executive, Fabio Kuhn;
-According to Prestige Economics, in the United States, “product inventories fell in last week’s DOE report by a combined 6.2 million barrels, bringing the total product inventory decline over the past six weeks to 36.5 million barrels”, stated Jason Schenker, President of the economy, currency, and commodity forecaster. That’s the biggest six-week drop in almost 11 years – and the summer driving season doesn’t even start for another seven weeks;
-During the first week of April, the net long speculative positions of both Brent, and WTI restarted to increase again by 54.000.000 barrels.
In the course of the second part of April, barrel prices dropped due to three factors related to the implementation of the U.S. foreign and energy policy.
Firstly, the U.S. President, Donald Trump, seemed to be dragged into the attack in Syria by one part of the Pentagon, rather than intending to increase the geopolitical tensions over the Russian Federation in the Middle East.
Secondly, according to the Energy Information Administration, after 9 weeks of bearish trend, U.S. gasoline stockpiles grew by 3.400.000 barrels, while diesel inventories rose by 2.700.000 barrels.
Thirdly, U.S. crude oil production reached 9.293.000 b/d – that is 523.000 b/d more since the beginning of 2017 – increasing by 10% since mid-2016.
At the time of writing, Brent was pricing at $49.47/b and WTI at $46.59/b.
In April, the ruble confirmed its strength over the dollar. In particular, the ruble/$ exchange rate, which opened at 56.35ruble/$, reaching 55.83 ruble/$ on April 17th, its record high since July 3rd 2015. At the end of the month, the Russian currency priced over the America currency at 56.82 ruble/$.
On April 28th, the Russian Central Bank cut the key rate by 0.5% to 9.25%. Previously, the Governor of the Institute, Elvira Nabiullina, stated “the potential economic growth (rates) amount to 1.5-2% if there are no structural transformations. How fast we will reach this potential growth rate (level) depends on the oil price, growth may be faster, but whatever the price of oil, without structural transformation we will stabilize at the economic growth level of 1.5-2%. […..]. The dependence of Russia’s economic growth rates on the oil price is not very high. A high (oil) price within the range of $40 and $60 (per barrel) will add around 1 percentage point to the growth, not more”.
Latest data and estimates on oil & gas
According to the Oil Market Report, published by the International Energy Agency on April 17th, world oil supply decreased by 755.000 b/d in March because OPEC and non-OPEC members extracted less barrels, improving compliance with the output reduction agreement. In particular, OPEC production was 31.680.000 b/d approximately, 800.000 b/d less than the ceiling decided on November 30th 2016.
Global demand is forecast to grow by 1.300.000 b/d in 2017 that is a second consecutive annual decline, though higher than the annual average rise of 1.200.000 b/d that has registered since 2000.
Based on the same Report, “it can be argued confidently that the market is already very close to balance, and as more data becomes available this will become clearer”. However, this statement does not mean that the OPEC and non-OPEC agreement will not be extended to the second half of 2017, as it seems more and more possible.
In accordance with the figures of the Drilling Productivity Report, published by the Energy Information Administration on April 17th, the American unconventional output is expected to increase by 124.000 b/d to 5.193.000 b/d in May.
The U.S. crude production, after the peak of 9.700.000 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 9.293.000 b/d, which was reached on April 28th2017.
In fact, according to the data provided by Baker Hughes, the total current number of U.S. rigs – 870 of which, 697 (80.3%) of oil rigs and 171 (19.4%) of gas rigs, plus 2 miscellaneous on April 28th – have been carrying on to rise again thanks to the increase in oil prices (y-o-y) and to the technological improvements of the sector.
In February 2017, the U.S. crude oil imports stood at 7.890.000 b/d, decreasing from the highest levels of 8.435.000 b/d reached in January (record since August 2012). However, this data is lightly higher than the average crude oil imports of 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.
Moreover, according to the General Customs Administration, in March, Chinese imports surged to an all-time high of 9.170.000 barrels – overtaking the U.S. imports – as a consequence of a larger purchase by independent domestic refiners and a fall in domestic output (3.920.000 b/d in the first quarter of 2017, -6.8%). At the same time, both commercial and crude Chinese stocks have been decreasing at their lowest in four years.
In the first quarter of the current year, the China’s gross domestic product rose by 6.9%, the best performance since 2015, boosted by a “hard switching from export to the domestic demand”, while U.S. GDP increased by 0.7%, the lowest increment in three years.
In our 2017 March Report, we wrote: “now, it seems that the frackers can endure the increasing of costs despite less productive wells being brought into use and with a higher break-even price [in addition to the fact that] the yield gap between the U.S. High Yield bonds and the U.S. Treasury bonds reached its lowest since July 2014”. During the first quarter of 2017, the rent of the drilling facilities increased to $14.600/d according to Rig Data, while the sand cost has overcame $40/t, more than doubling the prices reached at the end of 2016. Without any doubt, these two issues are not good news for the future of the U.S. on-shore un-conventional producers.
Geopolitics of Oil & Natural Gas
In December 2016, we introduced the possibility of an Oil Pax, summarized as the contact between two fundamental political factors.
Firstly, the nominee of Rex Tillerson, former CEO of Exxon Mobil, as Secretary of State by U.S. President, Donald Trump.
Secondly, the military victory of the Russian Federation and its allies into the Syrian conflict, which leads to the 2016 November oil agreement between OPEC and non-OPEC members.
Since then, we have put into light several energy agreements involving different countries, envisaging the “political bridge role” that Italy has been playing – with the actions of ENI and Intesa San Paolo – in implementing the so-called Oil Pax.
Having said this, what are the most important political countertendencies that happened in April and that moved in opposition to the Oil Pax, seemingly averting the new U.S. Administration and the Kremlin from the possibility of a real political and diplomatic reset?
-On April 5th, Steve Bannon, creator and point of reference of the alt-right Breitbart News site and mastermind of the White House strategy was fired from the U.S. National Security Council due to political reasons. Before him, on February 14th, Michael Flynn, at that time member of the same Council too, was forced to step down because he presumably hid to the U.S. Vice President, Mike Pence, that he had discussed with the Russian Ambassador in the United States about sanctions at a time when Donald Trump was still not in charge (officially, he has been in office since January 20th 2017), but became President of the country in November of the previous year;
-On April 7th 2017, the U.S. raid in Syria in the wake of the chemical weapons used in the village of Khan Sheikhounnear, the city of Idlib;
-On April 15th, the terroristic attack close to the city of Rashiddin, in Syria, made by the so-called “rebels”;
-Last, but not least, the crisis that has sparked in the Korean Peninsula.
According to Andrej Kortunov, Director of the Russian Council of Foreign Affairs, Donald Trump and Vladimir Putin may meet each other in Europe at the end of May: “Lo scopo principale di questo incontro – explains Kortunov cited by Kommersant – è mandare alle rispettive strutture burocratiche, a Mosca come a Washington, un segnale chiaro sulla necessità di mettere fine a questa guerra di parole e gesti per iniziare finalmente la ricerca di punti di contatto”.
In addition, on May 25th, the OPEC producers will have their next meeting in Vienna and the discussion will turn around the possibility to extend the November’s 2016-oil agreement to the second half of 2017.
The political results of these two meetings will certainly influence the perspective of the Oil Pax: for the time being, according to the Wall Street Journal, it seems that Exxon Mobil asked to the U.S. Treasury Department an exemption to the sanctions imposed from the United States of America over the Russian Federation with regard to the cooperation with Rosneft.
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