In September, oil prices significantly increased despite a trend characterized by a strong volatility. In particular, Brent Crude North Seaopened at $45.77/b and closed at $50.04/b, while West Texas Intermediate opened at $43.54/b and closed at $48.63/b. At the time of writing, oil prices were raising as Brent quality quoted at $52/82b – record high since last October – and WTI quality surged at $50.73/b – maximum since June.
Four factors determined the oil volatility trend:
– The €/$ exchange rate;
– The data provided by the Oil Market Report on September 13th with regards to supply and demand rebalance tendency;
– The data showed by the American Petroleum Institute on September 20th, regarding the U.S. crude stockpiles trend;
– The agreement reached during the International Energy Forum in Algeria on September 26 th/28th with regards to the future OPEC output.
Firstly, the €/$ exchange rate opened at 1.1146 €/$ and closed at 1.1161 €/$, forming the idea that it did not influence the barrel cost. However, if we look deeper into the first ten days of the month, it emerges that the dollar depreciated over the euro, reaching its lowest on September 8th at 1.1296 €/$, when Brent and WTI oil prices respectively, climbed at $49.68/b and at $47.96/b. Therefore, the weak dollar helped the rise in crude prices. Secondly, the Report published by the International Energy Agency, emphasizing that ”supply will continue to outpace demand at least through the first half of next year”, pushed the barrel on the fall in mid-September. In fact, the European and Asiatic benchmark quoted $45.90/b on September 19th, while the American reference traded at $43.76/b on September 16th. At the end of the month, a big driver for rising oil prices was the data provided by the American Petroleum Institute, which showed a 7.5 million barrel decline in U.S. crude stockpiles to 507.2 million barrels. This bearish trend has been carrying on as showed according to the data published by the Energy Information Administration on October 5th, which indicated that U.S. oil stockpiles fell for a fifth straight week by 3.0 million barrels. In addition, Brent quality price were propped up by steady data from Japan, where crude imports grew by 0.5% in August to 3.38 million b/d. Last, but not least, at the end of September, the pool deal inside OPEC Members – in coordination with non-OPEC producers in particular, the Russian Federation – sparked the current bullish oil trend and Brent crude price overcame $50/b as it did the last time on August 18th. According to the deal, output will be cut by approximately 700.000 b/d (OPEC crude production was 33.47 million b/d in August). It is the first such agreement in eight years, but it has to be ratified, in all likelihood, during the next OPEC meeting on November 30th in Vienna. On September 16th, the Central Bank of Russia cut the country’s key lending rate by 0.5% to 10% because inflation is slowdowning. It is the lowest rate since Russia has plunged into a recession in 2014 when the Governor, Elvira Nabullina, decided to free-float the ruble, which collapsed to 80 against the dollar and 100 over the euro on December 16th 2014. Since then, the Central Bank of Russia has steadily reduced the rate from 17% to the new current level. The previous cut was in June, when it cut the key rate from 11% to 10.5% after eleven months. Because of the oil price raise, the Russian currency appreciated over the American currency, quoting 63.17 rubles/$ on September 30th. It was 65.34 rubles/$ on September 1st and, at the time of writing, it was 62.12 rubles/$.
Based on the Oil Market Report published before the agreement reached in Algiers, global oil supply fell by 0.3 million b/d in August in comparison with the same period in 2015. Currently, world oil output is at around 96.9 million b/d and a near-record OPEC supply offset steep non-OPEC decline, which is estimated to fall by 840 thousand b/d in 2016. Non-OPEC supply is expected to return to growth in 2017, raising by 380 thousand b/d. The OPEC Oil Market Monthly Report published on September 12th suggested the same estimates too. Global oil demand is forecast to grow by 1.3 million b/d in 2016, 0.1 million b/d less than previously predicted.
If we look deeper into the non-OPEC supply, we can point out two issues:
– According to the statements made by the Russian Vice Energy Minister, Kirill Molodtsov, during the Oil & Gas Innovation Forum in Tyumen, the Russian Federation reached its oil production record high in the post-Soviet era at around 11.085 million b/d in September, 400 thousand b/d more than in August. This data is closed to the historic maximum oil output of 11.4 million b/d gained by the Soviet Union in 1987;
– Based on the figures published by the Energy Information Administration on September 12th, the American unconventional output is expected to decline by 61 thousand b/d in October. The U.S. crude production, after the peak of 9.7 million b/d in April 2015, decreased to 8.467 million b/d on September 30rd. In addition, for the second time during the current year, the U.S. crude oil imports reached 8.092 million b/d in July, increasing from 7.611 million b/d in June. They were 7.946 million b/d in May, 7.637 million b/d in April, 8.042 million b/d in March, 7.910 million b/d in February and 7.675 million b/d in January. The U.S. average crude oil import was 7.844 million b/d during the first seven months of 2016. Taking into account that the average was 7.344 million b/d in 2014 and 7.363 million b/d in 2015, our forecast that the United States will probably need to purchase more crude oil from abroad in the near future is gaining ground. At the same time, we have to put into light that the U.S. crude exports are raising too – but less than the increasing of U.S. crude imports, which also has to do with the quality of crude needed – and they reached 657 thousand b/d last August due to the fall in shipping freights.
With regard to the data and the consideration made by the Oil Market Report and theOPEC Oil Market Monthly Report too, which predicted that non-OPEC supply is expected to return to growth in 2017, it seems more likely that this increase will probably have to do with non-OPEC conventional production than with non-OPEC unconventional output. Relating to this forecast, there is the positive performance of the Norwegian output that was better than expected and, in particular, the restart of the Kashagan oilfield in Kazakhstan. This oilfield will resume the production in October, bringing into the market 230 thousand b/d more until the end of 2016, which will become 370 thousand b/d in 2017. At the same time, if prices do increase to at least $60/b, the non-OPEC unconventional production will probably start again and independent companies as Apache may have the possibility to exploit new tight oil and shale gas fields as Alpine High. This last discovery in the Permian basin, in Texas, is forecast to have reserves at around 8.1 million b/d.
What are the most important issues that we can point out after the meeting in Algiers?
– The decision to reduce the OPEC productive ceiling by 700 thousand b/d to 32.5 million b/d starting from next November will favour the rebalancing in the oil market that is still characterized by an excess supply and stockpiles too. From a political point of view, the reaching of an agreement means that Vladimir Putin’s wishes expressed in his interview to Bloomberg, on September 2nd, during the Eastern Economic Forum in Vladivostok, were granted. At that time, with regard to the upcoming International Energy Forum in Algiers, the Russian President had stated that ”it would be correct to find some sort of compromise”, and that Prince bin Salman “is a very reliable partner with whom you can reach agreements, and can be certain that those agreements will be honoured”. In addition, towards Iran, he had said that ”is starting from a very low position, connected with the well-known sanctions in relation to this country. It would be unfair to leave it on this sanctioned level”.
– Inside OPEC Organization, now, it seems that the strong fight between Saudi Arabia and Iran has been mitigating. The Saudis’ strategy implemented from September 2014 to flood the oil market with the aim of dropping prices and expel high costs producers did not completely carried out and especially not in the timing that they previously thought. On one hand, Riyadh reached the goal to drive out of the market many players but, on the other hand, it was not able to stop the resumption of Teheran’s output after the lifting of the sanctions and it also created serious problems to its State budget since the current ratio Deficit/GDP is at around 13%. Correctly, the Saudis’ oil Minister, Khalid al-Falih, before the reaching of the Algiers’ deal, said on September 27th, ”We are optimistic about the fundamentals. The market is trending in the right direction, slower than what we had hoped for a few months ago but the fundamentals are moving in the right direction”.
To conclude, we have to wait and see the ink of the formal agreement during OPEC’s official November meeting in Vienna and the future decisions of the Federal Reserve related the U.S. monetary policy. These are the two key factors that will lead oil prices to stabilize at around $50/b or more as some unconventional producers are strongly hoping.
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