The balance of power

At the center of the recent slowdown in crude oil prices, Washington's moves on the international geopolitical chessboard, the confrontation with OPEC and the movements of constant rapprochement between Russia and China
The balance of power
26 November 10:59 2018 Print This Article

In October, oil prices strongly decreased at around $10.5/b. In particular, Brent North Sea quality started the negotiations pricing at $84.95/b and closed at $74.59/b, while West Texas Intermediate grade opened the transactions trading at $75.45/b then, closing at $64.98/b. At the time of writing (November 13th), Brent was pricing at $65.95/b, the lowest level since March 2018 and WTI at $56.26/b, the minimum since November 2017. This drastic change is due to Donald Trump’s tweet strongly critical over Saudis’ will to cut production by 500,000 b/d during the next meeting in Vienna, on December 5th, and U.S. oil inventories increasing by 5,783,000 barrels on November 2nd to 431,787,000 barrels for 7 straight weeks in a row. This is the longest run of inventory gains since early 2017. In addition, Libya’s output approximately reached 1,000,000 b/d for the first time since the ousting of Muammar Gheddafi.

On October 3rd, prices reached their 4-year high, respectively quoting at $85.92/b and at $76.22/b, in the wake of a shrinking spare oil capacity. In OPEC countries, this amount does not exceed 1,400,000 b/d, with 1,300,000 b/d concentrated in Saudi Arabia, that is a decade’s minimum. Finally, prices have started steadily dropping.

This oil plunge was the result of several factors as followed:

1. Supply side. According to the data published by the Energy Information Administration, U.S. commercial stocks increased from 395,989,000 barrels on September 21st to 426,004,000 barrels on October 26th (publication date, 5 days after), especially because refinery utilization in the United States is slowdowning do to maintenance;

2. Supply side – The strongest indication that affected the bearish barrel trend was given by Saudi Arabia Oil Minister, Khalid al Falih, who stated on October 23rd that OPEC and its allies are in a “produce as much you can mode”. In the meantime, Kingdom’s output surged to approximately 10,700,000 b/d – near to an all-time high – overwhelming supply disruptions occurred in Venezuela and Iran, whose oil exports decreased to 1,800,000 b/d in September (-26%).

3. Demand side. Based on the figures provided by the Oil Monthly Report on October 12th, the International Energy Agency cut estimates for the 2018/19 oil demand growth by 110,000 b/d to 1,300,000 b/d and 1,400,000 b/d respectively, because of the rising threats over global economy (trade war, tariffs, high oil prices, the appreciation of the dollar that could affect emerging countries);

Finance. In accordance with the U.S. Commodity Futures Trading Commission data, the net long position – that is the difference between the bullish and the bearish bets — fell by 14% in the week to October 16th for both oil qualities.

Thanks to the U.S. Trade Department figures published on October 26th, during the III quarter of 2018, the U.S. real Gross Domestic Product (GDP) grew by 3.5%, slowdowning from the amazing 4.2% reached in the previous quarter. However, this data is higher than that forecast by the consensus (3.3%).

Furthermore, the U.S. economy created 250,000 new jobs in October thus, decreasing the U.S. unemployment rate to 3.7%, which is the lowest level since 1969.

On one hand, there is no doubt that these macroeconomic data are certainly positive, on the other one there are figures, which show that some rifts are looming in the U.S. economy too.

Firstly, based on the U.S. Treasury Department, the U.S. Debt skyrocketed to $21.52 trillion on September 28th, which marked the last day of 2018 fiscal year (+ 6.3%). Currently, the U.S. Debt/GDP ratio amounts to 105.4%. China, which sold $3 billion U.S. Treasury Debt in September, is the largest world holder of U.S. Debt with $1.17 trillion as of July 2018.

Secondly, the Congressional Budget Office estimated that the U.S. deficit reached $895 billion in the 2018 fiscal year, with the consequence that the United States of America will pay more in interests over the national debt than on the military or Medicare.

Thirdly, thanks to the Bureau of Economic Analysis, the U.S. Deficit Trade Balance widened to approximately $651 billion in the same period (it was $595 billion in 2017), because exports decreased by 3.5%, while imports increased by 9.1%.

In September, Russia’s foreign reserves reached their highest level after the 2008 global crisis, when they were $598 billion. With regard to the macroeconomic stability of the country, “The financial market remains stable. That is thanks to the joint actions of the government and the Central Bank. Our foreign exchange reserves have increased by 5.7 percent since the beginning of this year and are already at $459 billion [dollars]”, said Vladimir Putin. “In August, unemployment fell to 4.6 percent, which is a record low, and inflation in September was 3.4 percent”, the Russian President added. After having smashed a new record high since the end of the Soviet-era, accumulating more than 2,000 tons of gold, Russia’s gold stockpile now accounts for 17% of the country’s overall foreign exchange reserves, based on the last World Gold Council estimates.


Latest data and estimates on oil & gas
According to the data of the Oil Market Report, published by the Energy Information Administration on October 12th, global oil production reached at around 100,000,000 b/d in September that is 2,600,000 b/d higher than a year ago. OPEC crude oil extractions increased by 100,000 b/d in September to a one-year high of 32,780,000 b/d (735,000 b/d more than in May 2018). OECD commercial stocks enlarged by 15,700,000 barrels in July to 2,854,000,000 barrels, their highest level since February 2018.

Based on the Drilling Productivity Report data published by the Energy Information Administration on October 15th, the American unconventional output is expected to increase by 98,000 b/d to 7,714,000 b/d in November.

The U.S. crude production, after the former 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 11,600,000 b/d, which was reached on November 2nd 2018 (weekly forecasts, publication date, 7 days after).

Thanks to the figures provided by Baker Hughes on November 2nd, the 1,067 current U.S. active rigs, of which 874 (81.9%) are oilrigs and 193 (18,1%) are gas rigs, were 15 more in comparison with the data published on October 5th due to the 4-year record high in oil prices reached at the beginning of the same month. However, in the Permian basin, an area between Mexico and New Mexico, which produces 3,400,000 b/d, fracking growth is slowdowning from 134,000 b/d in October 2017 to an estimated 31,000 b/d in October 2018.

In particular, according to Bloomberg, sand has become a precious commodity that costs about $60/t, while truck driver salaries’ reached $150,000 a year. However, in the medium term, the worst issues could regard production and financing. In fact, the exploitation fracking rate is much higher than that of conventional reservoirs, while the U.S. Federal Reserve is set to a further increase in its interest rates, after the last increment of 25 basis points marked on September 26th, which brought them from 1.75/2% to 2/2.25%. Based on a report published by the Institute for Energy Economics and Financial Analysis (IEEFA) and the Sightline Institute, a consistent number of fracking companies are still struggling to make profits. “Even after two and a half years of rising oil prices and growing expectations for improved financial results, a review of 33 publicly traded oil and gas fracking companies shows the companies posting negative free cash flows through June”, the report warned in partial contradiction with the conclusions advanced by IEA last July.

In August, U.S. crude oil imports rose to 8,000,000 b/d. They were 7,923,000 in July, 8,480,000 b/d in June (monthly record high in 2018), 7,825,000 b/d in May, 8,244,000 b/d in April, 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. crude oil imports average stands at 7,949,000 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 energy
At the XI Eurasian Forum entitled Economy of trust and business diplomacy from the Atlantic to the Pacific, which took place in Verona, on October 25th, Igor Sechin, Rosneft’s CEO, stated that “in a few months we will witness the fifth anniversary of illegal sanctions against the Russian Federation. […]. Their use is rather a tool for putting pressure on certain countries in order to make them change their internal or foreign policies in unilateral interests, than a measure of responsibility under international law against economic entities. […]. Apparently, the United States has its own vision of its role in this process, and is pleased to grow into the role of regulator of the world oil market in accordance with methods of work quite far from market practices and with its own interests that are pretty far from being altruistic”. These measures, which have already been introduced against countries where there is about a third of the world’s oil reserves and a fifth of global output is produced, led to a destabilization of the oil market as follows:

1. OPEC reduced its share of the global market in favour of the American shale industry. As a result, OPEC+ production decreased by about 2,000,000 b/d by April 2017, while U.S. shale projects production contemporary increased by 2,200,000 b/d;

2. The ban on Iranian oil imports, which has come into force since November 5th 2018 and has been excluding some countries as Italy, Greece, Turkey, China, India, South Korea and Jappan could lead to a further destabilisation of barrel prices. In fact, in the wake of this situation, an unprecedented volume of Iranian crude oil – 22,000,000 barrels instead of the common 1/3,000,000 barrels a month – arrived in October at China’s northeast port of Dalian immediately before sanctions took place;

3. The measures imposed to Venezuela and the instability created in Libya by the previous U.S. Administration;

4. Impending the development of new energy joint projects. As for example, French Total withdrew from one of the largest gas projects in the world, the South Pars, located in the Persian Gulf, with significant losses.

The US prospects after the mid-term elections
The results of the U.S. mid-term elections, which took place on November 7th, showed that Democrats won the House of Rappresentatives, while Republicans consolidated their majority in the Senate.

Did U.S. President, Donald Trump, win or lose the elections?

At the moment, it is too early to say. Probably, it will be understood at the end of the month, when Trump will meet his Chinese and Russian counterpart respectively, Xi Jinping and Vladimir Putin, during the G20, in Buenos Aires.

If Trump wants to weave new political relationships with Russia and China based on mutual interests, which firstly exclude the resort to the military force, he must withdraw at least one part of the U.S. sanctions imposed over the Russian Federation and, at the same time, start the de escalation trade war towards China. This option could potentially lead to a new Yalta – in which the European Union will play a subaltern role – while the stipulation of the related agreements could occur during his eventual second mandate, after 2020. If he will be able to do it, there is no doubt that Trump’s fight with one part of the so-called American Deep State will inflame even more than it has been.

On the contrary, if Trump is not able to carry on this process, Russia and China will further strenghthen their strategic partnership and the United States will risk to accelerate their decline; causing the current U.S. President to be the face of disgrace for many years to come.

A legacy icon that seems very far from the so-called “America First”!

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Demostenes Floros
Demostenes Floros

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