Oil: the barrel fluctuates over $50
Feb 24, 2017 11:30 am
The real different maker on oil prices could once again be the spike in US output
Brent Crude North Sea opened at $55.64/b and closed at $55.48/b, while West Texas Intermediate opened at $52.48/b and closed at $53.32/b. In January, oil prices were steady over $50/b due to the full respect of the supply reduction programme by OPEC and non-OPEC countries in addition to the depreciation of the dollar over the major world currencies (euro, yen, rubble and pound).
Both qualities reached their minimum on January 10th respectivelly, pricing $53.62/b and $50.75/b because the hedge funds, after having amassed net-long speculative positions equivalent to 796 million barrels in the last week of December, started to cash their revenues. Even so, finance has not sparked a downturn in prices during the second half of the month as Ole Hansen, head of commodity strategy at Saxo Bank, feared.
Since November 30th, the barrel has approximately gained 15% worth. The Saudis, which should have reduced their output by 486 thousand b/d to 10.058 million b/d, are already pumping less than 10 million b/d according to the statements made by their Oil Minister, Al Falih, during the Atlantic Council Global Energy Forum in Abu Dhabi, on January 13th.
At the time of writing, the European and Asian benchmark was quoting at $56.85/b, while the American reference was trading at $53.79/b.
After having closed the year 2016 quoting at 1.0541 €/$, in early January, the appreciation of the dollar over the euro reached 1.0385 €/$ on January 3rd. Then, the green banknote turned its trend over the European currency hitting its lowest since December 8th at 1.0755 on January 31st, as a consequence of the US President inauguration speech, during which, Donald Trump put into light his protectionist economic policy.
As economist Vito Lops explained, the dollar gained 8% over the euro from November 8th 2016 (day of Trump’s election) to January 6th 2017 due to his promises to increase the deficit spending and to reduce the taxation to those enterprises, which repatriate their capitals detained abroad. Now, it seems that the market has estimated that “the glass is half empty‘ and the downward trend is related to protectionism.
For the same reason, on January 24th, the rubble – the trend of which is firstly oil dependent – reached its 18 months highest over the dollar, quoting 59.22 rubble/$ before closing the month at 59.90 rubble/$.
Latest data and estimates on oil & gas
According to the data provided by the Oil Market Report published on January 19th 2017, global oil supplies dropped by more than 0.6 million b/d in December, decreasing from the historical maximum of 98.2 million b/d reached in November, due to both lower OPEC and non-OPEC output. In particular, OPEC crude production (excluding Indonesia) fell by 320 thousand b/d to 33.09 million b/d from the previous record high of 34.2 million b/d reached in November.
In 2016, world supply is now forecast to increase by 0.3 million b/d in comparison with 2015 as a result of the OPEC record output, which more than offsets the 0.9 million b/d drop in non-OPEC production. Moreover, non-OPEC supplies are estimated to increase by 385 thousand b/d in 2017, 320 thousand b/d of which will be provided by the US. The estimates published by the l’OPEC Monthly Oil Market Report on January18th 2017confirmed this latter trend but the total rise is forecast at around 23 thousand b/d.
Global oil demand growth for 2016 is expected to surge by 1.5 million b/d (it was 1.4 million b/d according to the previous estimate), lightly slowing to 1.3 million b/d in 2017. Since the beginning of this century, the average growth demand rate has been 1.2 million b/d.
Once again, China will be the engine of the future oil demand. Specifically, the State owned enterprise – CNPC – calculated that in 2017 the Chinese crude consumptions would reach the record high of 11.88 million b/d that is an increase of 3.4% year to year. Furthermore, the oil imports will rise by 5.3% to an amount of 7.95 million b/d.
Based on the figures published by the Energy Information Administration on January 17th, the American unconventional output is expected to increase by 41 thousand b/d in February 2017 to 4.748 million b/d.
The U.S. crude production, after the peak of 9.7 million b/d in April 2015, decreased to its lowest of 8.428 million b/d on July 1st. It then started increasing to 8.960 million b/d, which was reached on January 20th2017. In fact, according to the data provided by Baker Hughes, the total current number of U.S. rigs – 712 of which, 566 (79.5%) of oil rigs and 145 (20.4%) of gas rigs, plus 1 miscellaneous on January 6th – have been carrying on to rise again thanks to the increase in oil prices.
In November, the U.S. crude oil imports overcame 8 million b/d (8.054 million b/d) for the fifth time during 2016, despite the total oil output increased. Even so, the American average crude oil imports was 7.879 million b/d during the first 11 months of 2016, on the rise if compared with the 7.344 million b/d imported in 2014 and 7.363 million b/d in 2015.
Despite the fact that the majority of the energy market analysts expected a surge in the 2017 U.S. oil output at around 9 million b/d, the frackers may have to face two kind of problems.
The first has to do with production. Little by little the U.S. unconventional output is increasing, the frackers will need to bring into use again wells that are less productive and with higher break-even costs than those that are currently being exploited. According to the Wall Street Journal, the U.S. tight oil costs have been rising between 10/20% since the beginning of the present winter. In the next months, should the U.S. unconventional producers adapt to this situation or will they need still higher prices, as someone seems hoping?
In fact, Saudis Oil Minister, Khalid Al Falih, during the World Energy Forum in Davos, stated, “What is being tapped recently in North America are the most prolific. As demand grows, they will go to the more expensive, more difficult, less prolific. They will find they need higher prices”.
The second issue regards the financing. According to Bloomberg, “Buyers of risky corporate bonds are starting 2017 in a precarious position. They are coming off the best year of returns since 2009, with a 17.5% gain last year that was largely fuelled by the rebounding oil prices. Many traders are betting that the good times will just keep on rolling. This is anything but certain‘. Now, that the interests related to the energy junk bonds are decreasing – while the Federal Reserve has increased its interest rates – the yield gap between the two different bonds is shrinking to less than 4%.
Geopolitics of Natural Gas
In 2016, Gazprom produced 419 Gmc3 of natural gas (calorific power equal to 37.38MJ/mc), increasing by 2.3% its output in comparison with 2015. At the same time, the gas exports to Europe (including Turkey) reached a record high of 179.3 Gmc3 (+12.5%), both in the Soviet Union, and in modern Russia period, said CEO, Alexey Miller, at a conference call on the occasion of New Year’s Eve. They were 158.6 Gmc3 in 2015 and 146.6 Gmc3in 2014. The previous maximum of 161.5 Gmc3 were reached in 2013.
What are the most important issues that emerge from this data?
-From 2015 to 2016, Gazprom’s share in the European gas market surged by 3%, reaching 34% thus, consolidating its role of top supplier despite all the attempts by the European Union to diversify its sources;
-This success is due to a variety of causes as the non-stop investment policy and in particular, the price policy. Gazprom’s long-term contract price averages at about $170 Gmc3, while spot prices are above $200 Gmc3. The Russian gas price is currently lower than the spot one, because its oil linked. Therefore, gas prices are discounting the low barrel prices quoted during the first half of 2016. Having said this, the dispute between indexation and spot prices is still an open discussion as pointed out by Sergey Komlev, Gazprom’s Contract Structuring and Price Formation Directorate, in his report The Best Remedy for Market Failure in the Natural Gas Industry;
-The U.S. shale gas – that has been starting to trade in the international markets, as LNG, did not limit the purchase of the Russian gas as many EU politicians wished. On the contrary, it seems that the American shale gas is taking the direction of the Asian market, because this latter is characterized by a strong demand and higher prices ($10/Mbtu) in comparison with those in Europe. Unfortunately, we cannot exclude that this situation may support in the next future a bullish trend of the European spot prices too.
To conclude, after having determined the so-called Oil Pax winning the war in Syria, it seems that the Russian Federation scored another goal in its favour. The U.S. President, Donald Trump, must take it carefully into account during the future desirable meeting with his counterpart, Vladimir Putin. At the same time, as we clearly suggested to the Italian elite in our last report, our country has another reason to play a pivot role in the Mediterranean and between the two super powers. Of course, in Brussels, someone may not be so happy about it.
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