Changing scenarios

On August 7, both Brent and WTI fell to their lowest monthly level as a result of the intensifying trade war between the United States and China. Today the situation is suddenly changing
Changing scenarios
27 September 00:12 2019 Print This Article

On August 26th 2019, Bloomberg wrote, “The consortium of oil-producing nations has seen few tangible results from the production cuts begun in January. Although prices moved slightly northward in April to $66 per barrel, WTI crude has actually fallen 19.5% since then, and some OPEC+ members are getting cold feet. Saudi Arabia has agreed to shoulder most of the burden of cuts until September, but slowing global demand may see the entire strategy abandoned”.

In virtue of this context, Bloomberg suggests that oil producers have two options in order to sustain barrel prices.

Firstly, they could strengthen supply cuts, (in July the OPEC+ compliance rate reached 159%).

Secondly, if conventional producers think that the U.S. shale is “on its last legs” – as wrote on August 8th 2019, pointing out the strong slowdown of the American fracking productivity growth – they may bite the bullet and produce more crude at a lower price with the aim of restoring a part of their revenues. In reality, OPEC’s output rose by 200,000 b/d to 29,990,000 b/d in August 2019.

Neither the first option nor the second one seem to be so easy to undertake by OPEC+, because among the Organization some producers don’t want to implement further cuts and Saudi Arabia can’t support the entire burden. In the meantime, the U.S. unconventional output trend is not so easily predictable either.

So, what is the key of the solution?

First of all, it is important to underline that current listings are still higher than prices listed on January 1st 2019 when OPEC+ producers started to reduce their output by 1,200,000 b/d.

Secondly, based on Global Times figures, in August 2019, the U.S. ISM Manufacturing Index shrank to 49.1 for the first time in three years – the lowest level since 2016 – in comparison with the previous data of 51.2 and an estimated 51.4.

At the same time, the China Caixin Services Index increased to 51.2, showing that the policies of increasing domestic consumptions and fiscal reductions decided by the Chinese authorities on December 24th 2018 were the appropriate response towards the American duties, in addition to the complete suspension of U.S. oil imports, which were approximately 500.000 b/d in August 2018

On August 29th, Tom J. Donohue, chief executive officer of the U.S. Chamber of Commerce, wrote that “President Trump — and Chinese President Xi Jinping — should withdraw the additional tariffs scheduled to go into effect Sept. 1 and Dec. 15 and return to the negotiating table in good faith”.

On September 5th, China’s vice President, Liu He, U.S. Secretary of State, Steven Mnuchin, and the U.S. Trade Representative, Robert Lighthizer, decided to have a new round of meetings next October.

The impression, stated economist Pasquale Cicalese, is that the United States of America are losing the trade war against China and Trump’s policies can’t stop the de-industrialization of the United States of America.

Thanks to the ADP National Employment Report published in September, in the U.S. private sector, employment increased by 195,000 from July to August. However, 184,000 of these jobs were created by services. In addition, the U.S. monthly trade deficit reached 72.3 billion dollars.

In the short term, the issue lies in geopolitics. From this point of view, the firing of U.S. National Security Advisor, John Bolton (an anti-Iranian hawk), by President Donald Trump occurred on September 10th, reveals that the majority of the current Administration in Washington wants to reach an agreement with Beijing, easing tensions, both with Iran, which is a fundamental country in the project One Belt One Road, as in the Southern China Sea.

At the same time, it was not by chance that the China State Administration of Foreign Exchange implemented new financial measures, specifying that from now on the investment ceiling of foreign investors in the Chinese financial market will be unlimited, while previously it was 300 billion dollars.

From a political point of view, these two issues could mean finance for – an (unknown) period – of peace!

On September 16th, Brent skyrocketed at $71.15/b and WTI at $64.41/b, following the drone strikes on Saudi’s Abqaiq oil plant and Khurais oil field. This time, Saudi’s output has been decreasing by 5,700,000 b/d, approximately 5% of the world oil supply, with the risk of increasing barrel prices to $100/b. U.S. Secretary of State, Mike Pompeo, immediately pointed the finger towards Iran, after which President Donald Trump authorized the release of an unspecified amount of Strategic Petroleum Reserves (the United States have 645 million barrels of oil Reserves).

Given that it is still unclear whether the attacks came from Yemen, Iran or the Iraqi or Syrian Kurdistan, probably, Houthi are receiving the militarized drones from Iran, but it has not to be excluded that somebody want to boycott the supposed face-to-face meeting between President Donald Trump and his Iranian counterpart, Hassan Rouhani, on the sidelines of the U.N. conference at the end of September.


Latest data and estimates on oil & gas

Thanks to the figures provided by the Oil Market Report, published in the International Energy Agency on August 9th 2019, global demand fell by 160,000 b/d in May, the second annual fall occurred in 2019, while supply was steady (above 100,000,000 b/d). IEA decreased its global growth estimates for 2019 and 2020 by 100,000 b/d and 50,000 b/d, to 1,100,000 b/d and 1,300,000 b/d, respectively. OECD commercial stocks rose by 22,800,000 barrels in May 2019 (month over month) to a total of 2,906,000,000 barrels and stood 6,700,000 barrels above the five-year average.

Based on the Drilling Productivity Report figures issued by the Energy Information Administration on August 12th 2019, the American unconventional crude output is estimated to increase by 85,000 b/d to 8,546,000 b/d in September 2019.

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 the estimated record of 12,500,000 b/d, which was reached on  August 23rd 2019, before lowering again to 12,400,000 b/d on September 6th 2019 (weekly forecasts).

Thanks to the statistics provided by Baker Hughes on September 6th 2019, the 898 current U.S. active rigs, of which 738 (82.2%) are oilrigs and 160 (17.8%) are gas rigs, were 36 less than August 9th 2019, the lowest level since March 11th 2017.

On September 3rd, Raymond James wrote, “We believe the single most important longer-term driver of oil prices and the energy market over the next five years will be the change in U.S. well productivity”. […]. This is “very bullish for oil prices next year”.

On September 9, highlighted that “Since 2010, when the shale oil revolution really got started, the average horizontal well productivity has increased by an average of 30% through 2018, but oil well productivity gains have almost stopped in 2019. Just a few months ago […] Raymond James were forecasting a 10% productivity gain this year and 5% in 2020. Other analysts had even higher estimates”.

In June, U.S. crude oil imports diminished by 17,000 b/d to 7,141,000 b/d. They were 7,158,000 in May, 7,025,000 b/d in April 2019, 6,759,000 b/d in March 2019, 6,652,000 b/d in February 2019 and 7,520,000 b/d in January 2019. The 2019 U.S. crude oil imports average stands at 7,042,500 b/d, on the fall in comparison with 7,757,000 b/d in 2018 and 7,969,000 b/d in 2017.


Oil and currency trends

In August 2019, oil prices decreased due to both economic and geopolitical factors. In particular, Brent North Sea quality, started the quotations at $64.01/b and closed at $60.36/b, while West Texas Intermediate opened the negotiations at $57.69/b, closing at $55.08/b.

On August 7th, both the European and Asian benchmark Brent and the American reference WTI lowered to their monthly minimum, respectively pricing $56.41/b and $50.93/b, as the commercial war between the United States of America and China intensified, slowing global economy and oil demand too. Moreover, from July 26th to August 9th, U.S. oil stocks increased from 436,545,000 barrels to 440,510,000 barrels.

During the second part of the month, oil prices recovered part of the ground previously lost due to the following factors.

On August 19th, the Shaybah Saudi plant, which approximately produces 1,000,000 b/d, less than 10% of the entire Petromonarchy output, was hit by Yemeni fighters drone.

In addition, on August 23rd, U.S. commercial inventories dropped to 427,751,000 barrels.

At the time of writing (September 17th), Brent was trading at $67.53/b, while WTI at $62,36/b.


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Demostenes Floros
Demostenes Floros

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