The positive price trend

The factors which have led to the recovery include the sudden drop in US crude stocks and the resumption of US sanctions against Iran, further strengthened by the appointment of John Bolton, who has previously declared himself opposed to the nuclear deal
The positive price trend
17 April 10:05 2018 Print This Article

In March, oil prices strongly increased (over 5%) in the wake of the OPEC/non-OPEC agreement cuts – with compliance reaching 138% in February – due to the global trade tensions raised between the United States of America, China and the European Union. Especially, Brent North Sea quality opened the negotiations at $64.15/b and closed at $69.67/b, while West Texas Intermediate grade opened at $61.34/b, closing at $65.14/b.

At the time of writing, the European and Asian benchmark was trading at $68.32/b, while the American reference was quoting at $63.60/b, because of concerns about an escalating trade war between China and the U.S.

On March 23rd, despite the U.S. crude production reaching 10,407,000 b/d – a record high since 1970 – both Brent and WTI hit their monthly maximum, quoting $70.36/b and $65.80/b respectively. Three simultaneously factors could explain the bullish barrel trend, which occurred during the last 10 days of the month.

In particular, on March 21st:

1. After having surged by 5,220,000 barrels as refineries head into seasonal maintenance, the U.S. crude stockpiles unexpectedly fell by 2,622,000 barrels, the largest drop since early January 2018. According to the data provided by the Energy Information Administration, they decreased below the five-year average for the first time since 2014, On March 28th, U.S. crude inventories increased again by 1,640,000 barrels, widening the Brent/WTI price gap over $5/b while, on April 4th, they suddenly fell by 4.617.000 barrels;

Glut Fear
U. S. oil stockpiles have been inching higher

2. The Governor of the Federal Reserve, Jerome Powell, stated, “The labor market has continued to strengthen and that economic activity has been rising at a moderate rate”. The U.S. Gross Domestic Product rose by +2.5% during the IV quarter of 2017. For these reasons, the FED decided to increase its interest rates by 25 basis points to 1.50/1.75%.

In March, the dollar appreciated over the euro. Especially, the €/$ exchange rate opened at 1.2171 €/$ – the lowest since January 12th 2018 – closing at 1.2324 €/$. According to the U.S. Treasury data, the American Public Debt has surpassed $21 trillion for the first time in history;

3. The meeting between U.S. President, Donald Trump, and Saudi Prince, Mohammed Bin Salman, sparked tensions concerning the possible renewal of the Iranian crisis. Based on FGE, any resumption of unilateral U.S. sanctions against Iran could lead to a drop in its oil exports by 250,000 b/d to 500,000 b/d by the end of this year. In addition, the nominee of John Bolton – who was against the Iranian nuclear agreement – as National Security Advisor had a bullish impact on prices too.

 

In February, OECD inventories dropped to around 44,000,000 barrels above the five-year average. In January 2017, at the beginning of the OPEC/non-OPEC deal, there were 293,000,000 barrels above that level therefore, at the current conditions, the oil market will be rebalancing between the II and the III quarter of 2018.

However, Bloomberg correctly pointed out “years of excessively high supplies mean that measure is itself higher than normal, while the patchy nature of data outside the OECD makes it difficult to get an accurate picture of the entire world market”.

Latest data and estimates on oil & gas
According to the Oil Market Report data published by the International Energy Agency on March 15th, global oil supply increased to 97,900,000 b/d in February, rising by 700,000 b/d on a year earlier due to higher non-OPEC output. In particular, OPEC crude oil production lightly decreased to 32,100,000 b/d, because of losses in both Venezuela and the UAE.

In January, for the first time since July 2017, OECD commercial stocks increased by 18,000,000 barrels, reaching 2,871,000,000 barrels. The surplus to the five-year averaged now stands at 53,000,000 barrels.

Oil global demand is estimated to boost by 1,500,000 b/d in 2018 to 99,300,000 b/d, 100,000 b/d more in comparison with last month’s prediction.

Based on the Drilling Productivity Report figures published by the Energy Information Administration on March 12th, the American unconventional output is expected to increase by 131,000 b/d to 6,954,000 b/d in April.

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 10,460,000 b/d, which was reached on March 30th2018 (weekly forecasts).

Thanks to the data provided by Baker Hughes on March 29th, the 993 current U.S. active rigs, of which 797 (80.3%, the maximum since August 4th) are oil rigs and 194 (19.5%) are gas rigs, were 12 more in comparison with the figures published on March 2nd. This is probably due to the increase in sand cost.

In January 2018, the U.S. crude oil imports increased to 8,012,000 b/d. 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 February, the United States of America exported 237,020 b/d, falling from the 472,500 b/d marked in January, while Russia’s oil exports to China reached 1,320,000 b/d, increasing by 17.8% in comparison with a year earlier.

Last, but not least, based on the data provided by the World Gold Council, the Russian Federation rose its gold reserves in March to 1,857.7 t (17.9% of total reserves), becoming the fifth-largest physical gold owner after the United States of America, Germany, Italy and France. Based on the Central Bank of Russia, the country has been rising its gold holdings every month since March 2015.

 

Geopolitics of oil and gas
On March 8th, the President of the United States of America, Donald Trump, issued the Presidential Proclamation on Adjusting Imports of Steel into the United States. According to the Proclamation, the U.S. imposed tariffs of 25% and 10% on steel and iron imports respectively. In particular, the deal excluded countries as Canada and Mexico, with which the Unites States are currently renegotiating the NAFTA agreement.

What could be the possible consequences in the energy field in particular, with regard to the U.S.-China future relation trade?

It is important to point out that the U.S. output of steel and iron approximately account for 1% of the American Gross Domestic Product and it occupies 200.000 employees in the United States.

Secondly, China exports only 7% of the steel that it produces. Only 3.5% of the steel imported by the United States is from China. In fact, China is the tenth U.S. steel supplier, while the Russian Federation is the eighth and Italy is the eleventh.

Thirdly, 2017 U.S. trade deficit toward China accounts for $375 billion.

Taking into account that 77% of the steel used in the United States to produce oil and gas rigs is imported and, at the same time, it is difficult to find the same quality of steel within the country, the tariffs announced by the White House may be a menace for the entire U.S. energy sector.

Moreover, the increasing of the material costs by 25% could thwart the U.S. oil & gas exporting ambitions, threatening the construction of LNG projects in Texas and Louisiana too. In fact, as Bloomberg wrote, U.S. President Donald Trump may be helping to revive Canada’s dream of a liquefied natural gas export industry to supply growing markets in Asia.

On March 23rd, U.S. Secretary of Commerce, Wilbur Ross, stated “China needs to import very, very large amounts of LNG and, from their point, it would be very logical to import more of it from us, if for no reason other than to diversify their sources of supply. It would also have the side effect of reducing the deficit”.

On March 26th, the Chinese Trade Ministry, Zhong Shan, declared during a meeting with former U.S. Treasury Secretary, Henry Paulson, that China does not want a commercial war with the United States of America. However, it would not have any fear to face it.

It may only be by chance that the same day, for the first time ever, the petro yuan denominated contracts convertible in gold began trading on the Shanghai International Energy Exchange. The oil Chinese future is linked to the following crude qualities:  Dubai Crude (Dubai-UAE), Oman Crude (Oman), Basrah Light Oil (Iraq), Upper Zakum (Abu Dhabi-UAE), Masila Crude (Yemen), Qatar Marine Crude (Qatar), Shengli Oil (China).

Crude futures for September settlement opened at 440 yuan a barrel, up from a reference price of 416 yuan a barrel.

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Demostenes Floros
Demostenes Floros

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