Prices rise even after OPEC agreement
Jul 9, 2018 9:51 am
In addition to the positive trend, the Vienna agreement has allowed Russia and Saudi Arabia to achieve two fundamental objectives: higher production and consequently higher income
Despite the agreement to raise oil output by 1,000,000 b/d achieved by the so called OPEC + group during their meeting in Vienna on June 22nd/23rd, barrel prices increased. In particular, WTI benchmark gained at around $7.5/b.
Brent North Sea quality opened the negotiations at $76.76/b and closed at $77.75/b, while West Texas Intermediate opened at $65.75/b, closing at $73.34/b (the highest since 2014). Both the European and Asian benchmark and the American grade reached their monthly low on June 18th, respectively quoting $73.03/b and $64.15/b.
Presumably, the oil production will increase by 700,000 b/d, because some OPEC members as Iran, Venezuela, Libya – which output decreased from 1,000,000 b/d to 750,000 b/d in May – and Nigeria will not be able to increase their extractions due to issues related with sanctions, economic crisis and geopolitical turmo
In reality, the current barrel output is lower than that fixed in November 2016, so the 1,000,000 b/d increase would approximately bring it back to the agreed cap.
The increasing in price by the two most important global oil benchmarks has been characterized by a different intensity. In fact, WTI strongly rose because of the following reasons:
1. The U.S. commercial stocks bearish tendency. In particular, U.S. crude inventories dropped from 436,584,000 barrels on June 1st to 416,636,000 barrels on June 22nd.
“The spread between WTI and Brent is shrinking as OPEC’s output increase is having a bigger impact on Brent than WTI”, said Hong Sungki, a commodities trader at NH Investment & Securities Co. “Cushing stockpiles are quickly withdrawing as the U.S. summer driving season boosts refiners’ demand for crude, supporting WTI prices”;
2. In Canada – owing to a failure in the Syncrude facility, which is linked to the Cushing oil stock terminal in Oklahoma, the most important WTI delivery point in the United States of America – supply could fall up to at least 360,000 b/d, till next August.
Before the OPEC + meeting, Iranian Oil Minister, Bijan Namdar Zangeneh, said it was likely to reject any agreement that raised output from the group. Taking into account that Iran will be unable to increase its extractions in the coming months, probably his aim was to pursue the other OPEC + members not to boost their per head production above the 2016 November limits thus, avoiding to grab Iran’s oil market share. However, from a strictly political point of view, Iran may only rely on Russian Federation’s support – which output, according to Interfax, already reached 11,090,000 b/d during the first week of June, 143,000 b/d higher than the cap agreed with OPEC in late 2016 – while the United States of America are explicitly pushing Saudi Arabia to boost its output by 2,000,000 b/d.
Probably, U.S. President, Donald Trump, who seems to be so eager in resolving a range of diplomatic disputes with his Russian counterpart, Vladimir Putin, will face the above mentioned issue during the bilateral meeting that will take place on July 16th, in Helsinki.
Latest data and estimates on oil & gas
According to the figures published by the Oil Market Report on June 13th, global oil supply rose by 276,000 b/d in May, to 98,700,000 b/d, with OPEC crude output standing at 31,690,000 b/d (+ 50,000 b/d). OECDcommercial stocks decreased by 3,100,000 barrels in April, reaching a new three-year low of 2,809,000,000 barrels.
Global oil demand growth is estimated to increase by 1,400,000 b/d, both in 2018 and in 2019 (first estimate).
Based on the Drilling Productivity Report data published by the Energy Information Administration on June 18th, the American unconventional output is expected to increase by 141,000 b/d to 7,339,000 b/d in July.
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 10,900,000 b/d, which was reached on June 22th2018 (weekly forecasts).
Thanks to the figures provided by Baker Hughes on June 2th, the 1,047 current U.S. active rigs, of which 858 (81.9%) are oil rigs and 187 (17.9%) are gas rigs plus 2 miscellaneous (0.2%), were 12 less in comparison with the data published on May 25th, probably because the U.S. tight oil growth output will stop in the next 3-4 months due to a limit related to the pipeline transport capacity of the raw material as cited by Scott Sheffield, CEO of Pioneer Natural Resources. Moreover, with regard to the frackers financial costs, it must be taken into account that the Federal Reserve, on June 13th, for the second time in the current year, increased its interest rates by 25 basis points to 1,75/2%.
In April 2018, the U.S. crude oil imports increased to 8,244,000 b/d. They were 7,616,000 b/d in March, 7,493,000 b/d in February and 8,012,000 b/d in January. Currently, the 2018 U.S. average crude oil imports stands at 7,841,000 b/d. It was 7,912,000 b/d in 2017, 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.
Geopolitics of Oil & Gas
What are the most important geopolitical consequences of the OPEC +?
Firstly, Saudi Arabia and the Russian Federation reached two goals.
The oil production was increased and therefore their revenues were too.
Based on the Russian Finance Minister, Anton Siluanov, the National Welfare Fund of Russia will be replenished by 2,2 trillion rubles (about $35 billion) in 2018. “According to our estimates, by the end of this year, the volume of replenishment of reserves will be 2.2 trillion rubles, which will be credited to the National Welfare Fund next year”, Siluanov said. “At the end of 2018, the NWF will be 3.6 trillion rubles (about $60 billion)”, added the minister.
However, the strengthening of the alliance between the two-world oil exporter leaders in the wake of the new force relations emerged after the Syrian war.
Secondly, Iran seems to be in a sort of limbo.
Theoretically, the country may extract in line with the November 2016 OPEC & non-OPEC deal. In any case, since May 8th 2018, the U.S. has been putting into place sanctions that effect some European majors – such as French Total and British-Dutch Royal Dutch Shell – have already stopped buying its crude.
Moreover, the United States has openly asked Japan to completely halt oil imports from Iran.
At the same time, Sunjay Sudhir, joint secretary for international cooperation at India’s petroleum ministry, stated to CNN Money, that “India, [which is the second Iranian oil buyer] does not recognize unilateral sanctions, but only sanctions by the United Nations”. Also Turkey’s Economy Minister, Nihat Zeybekci, said that his country will carry on to purchase oil from Iran.
As was written in the previous monthly report, the yuan-denominated oil future issued in the Shanghai Stock Exchange last winter may be one of the tools that Iran would use in order to try to bypass the U.S. sanctions, seeing as China is the first Iranian oil purchaser.
Moving from the world oil market to the regional natural gas markets, it seems that the Russian Federation is consolidating its strategy in this field too.
In fact, in 2017, Gazprom exported to Europe (European Union + Turkey + Serbia + North Macedonia) 192.2 Gmc3 of natural gas (calorific power equal to 37.053 MJ/mc), which is an ever record high.
In addition, the Russian state owned company has still been supplying Europe with volumes of gas comparable with those during the winter period because of the intense depletion of many European storage sites, which are at their lowest levels in, at least, a decade.
Gazprom’s Deputy Chief Executive Officer, Alexander Medvedev, said in an interview in Berlin on April 22ndthat “Minimal historical gas storage levels will mean that summer demand will match winter demand of the not so distant past, given the need to refill the stores. In addition, our gas remains the most cost-competitive”.
More precisely, according to Maria Belova, head of research at VYGON Consulting, “The average Gazprom price at the German border in 2017 neared the average European price (weighted average price of long-term contracts and spot prices) at around $5.65 per MMBtu. The estimated Gazprom price at the German border in the first quarter of 2018 increased to $7.15 per MMBtu. The US LNG gas landed and regasified in Belgium (Germany doesn’t have any LNG receiving terminals) cost around $7.9 per MMBtu, $8.1 per MMBtu in the first quarter of 2018. Therefore, American LNG is the more expensive option compared to Russian gas”, the analyst concluded.
Therefore, Gazprom estimates that in 2018 it will exceed 200 Gmc3 of natural gas exported to Europe for the first time ever. During the first quarter of the current year, gas supplies increased by 6.6% in comparison with the same period of 2017 (revenues +22.6% equal to $12,4 billion), while in April they achieved the record of 15.9 Gmc3 (70 Gmc3 from January to April 2018). With regard to the first half of 2018, estimates indicate an increase by 5.8% to 101,2 Gmc3, which is a record for the Russian company.
In the meantime, China exceed Japan as the world leader in gas import.
Based on the data published by the Chinese General Administration of Customs, since the beginning of 2018, China has imported 34,9 million tons of gas compared with Japan’s 34,5 million tons (source: Japanese Ministry of Finance).
In accordance with the International Energy Agency estimates, China will account for more than 1/3 of global gas demand growth till 2023. On June 8th, during a working meeting in Beijing between Alexey Miller, Chairman of the Gazprom Management Committee, and Wang Yilin, Chairman of the Board of Directors of CNPC, the parties envisaged that the Power of Siberia pipeline’s linear part from the Chayandinskoye field to the Chinese border was completed by 84.4% (over 1,820 kilometers).
Nowadays, it might be said that, Russian President, Vladimir Putin, was a farsighted politician when, in 2003, he noted that “blue gold” would have acted as a bridge between the era of fossil fuels and that of renewables, opining that “Russia’s role in the global energy markets largely determines its geopolitical influence”.
Back in May 1986, the barrel price dropped under $10/b as a result of the common strategy between the Saudis and the Americans, which had the double aim of overthrowing the Soviets from, both Afghanistan and the Middle East, and the financial collapse of the U.S.S.R. Just 32 years later, Khalid Al-Falih, Saudi Energy Minister, “invited Russia to join [OPEC] as an observer, an associated member. We believe they are considering it. I can assure that the entire membership of OPEC would welcome Russia”, he also added. Russian Energy Minister, Aleksandr Novak, confirmed that there was “such an option”, and Moscow was “studying it closely”.
To conclude, it was probably not by chance if Bloomberg, on June 22nd, published an article with the following title: Russia-Saudi Plans for Super-OPEC Could Reshape Global Order.
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