In August, Brent North Sea quality opened at $51.52/b and closed at $52.85/b, while West Texas Intermediate price reduced, moving from $49.03/b to $47.11/b.
During the first part of the month, both the European and Asian benchmark and the American reference were quite stable. In particular, on August 9th, Brent quoted at $52.76/b because the futures related to this quality returned in backwardation, while WTI reached its monthly high at $49.81/b.
Subsequently, oil prices diminished and, on August 16th, both qualities touched their monthly low, quoting at $50.34/b and at $46.79/b as OPEC compliance to November 2016 agreement fell to 75% and U.S. oil production overcame 9,500,002 b/d for the first time since July 2015. Moreover, this latter data explain to us while WTI bearish trend was stronger than Brent tendency.
During the last ten days of August, whereas Brent prices raised thanks to the dollar depreciation over the euro – 1.2048 €/$ on August 29th, the lowest since January 2015 – WTI did not significantly recover as a consequence of Hurricane Harvey, which hit Texas. In fact, refinery outages mean a steep drop in oil demand (-5% in comparison with the 3rd week of August).
In our previous report, we wrote that if the price of Brent – returned to backwardation at the end of July – had continued in the next weeks, it would have contributed to opening a new scenario for OPEC and non-OPEC producers. On one side, the strong demand – estimated to grow by 1,500,000 b/d in 2017 – confirms our thesis but, on the other side, OPEC and non-OPEC producers must take care of their last arrangement since the American fracking producers, despite the persistence of some clouds on the horizon, are still increasing their output (9.530.000 b/d on August 25th).
In July, oil prices increased. In particular, Brent North Sea quality opened at $49.58/b and closed at $52.68/b, while West Texas Intermediate opened at $47.19/b and closed at $50.20/b.
On July 7th, both the European and Asian benchmark and the American reference reached their monthly low, respectively pricing at $47.00/b and at $44.47/b as official data showed that U.S. drillers boosted production by 1% during the last week of June. In fact, after the U.S. oil extractions temporarily diminishing by 100,000 b/d to 9,250,000 b/d, they reached again 9,338,000 b/d.
Subsequently, barrel prices started to rise and, on June 19th, Brent traded at $49.70/b while WTI at $47.31/b. Three reasons can explain this bullish trend:
1. On June 13th, according to the data provided by the Energy Information Administration, U.S. refineries worked at 94.5% of their maximum capacity and the American crude stocks decreased by 7,600,000 b/d, the highest fall since September 2016. Simultaneously, U.S. gasoline inventories dropped by 1,600,000 b/d;
2. The dollar depreciated, both over the euro, and towards a basket of global currencies;
3. In the II quarter of 2017, China’s real Gross Domestic Product grew by 6.9% in comparison with the same period of 2016. This positive tendency was faster than expected and in line with the I quarter’s growth. The Chinese government is aiming to rise its GDP to around 6.5% in 2017.
After a new slight fall in barrel prices of approximately $2/b – probably, reconnected to the speculation – verified within 19th/21th of July, oil prices increased during the last week of the month in the wake of the decisions taken during the St. Petersburg meeting on July 24th. In particular:
1. Saudi Arabia decided to cut its oil exports to 6,600,000 in August, 1,000,000 b/d less in comparison with the same period of 2016, while United Arab Emirates will slash their September oil deliveries by 10%;
2. Nigeria, which is exempted by the 2016 November agreement, promised to collaborate with the cuts decided by the other OPEC Member as soon as it reaches the output of 1,800,000 b/d. At the moment, Nigeria’s production is slightly below this level;
3. By common consent, the Russian Energy Minister, Aleksander Novak, and his Saudi colleague, Khalid al-Falih, expressed their support to an eventual extension of the 2016 November agreement. At the moment, the deal will end on March 31st 2018;
4.The increase in U.S. oil and gas rigs is slowing down while U.S. inventories are showing massive drawdowns (10% less from their March peaks).
To conclude, if policy makers and investors want to look deeper into the analysis of the barrel trend, which happened during the last months, they have also to take into account the statements made on July 22nd by ENI CEO, Claudio Descalzi, who said, “There is a great deal of speculation going on. If, for instance, the price of crude oil goes up to 52 dollars, regardless of inventory levels, then everyone sells straightaway because they have no confidence in what’s going to happen. If the price drops back to 46 dollars, then they buy it back. That way, there are speculators making hundreds of millions, perhaps billions, of dollars every day.”
If the price of Brent – returned to backwardation at the end of the month – will it continue in the next weeks and contribute to opening a new scenario for OPEC and non-OPEC producers?
In June, oil prices decreased. In particular, Brent North Sea quality opened at $50.25/b and closed at $47.90/b, while West Texas Intermediate opened at $48.18/b and closed at $46.20/b. At the time of writing, Brent crude was trading at $48.57/b, while WTI was quoting at $45.90/b.
On June 21st, both the European and Asian benchmark and the American reference reached their 8-month low, respectively pricing $44.79/b and $42.25/b due to the following reasons:
1. During the first part of the month, global oil inventories (OSCE area) exceeded again 3 billion barrels. Especially, after two months during which U.S. oil stockpiles decreased by 25.600.000 barrels, they unexpectedly rose;
2. Both Nigeria, and Libya – which are exempted by the November 2016 agreement – increased their extractions, adding into the market 375,000 b/d;
3. On June 16th, the U.S. oil production has reached 9,350,000 b/d for the first time since August 2015 thanks to the fracking activity.
The light recovery verified during the last week of June was because in the U.S. crude stocks decreased by 2,500,000 barrels and the gasoline inventories by 578,000 barrels according to the Energy Information Administration. Moreover, U.S. oil extractions diminished by 100.000 b/d to 9,250,000 b/d.
To conclude, if barrel prices fell to their lowest level since November 2016 in spite of the supply cuts by OPEC and Russia and the geopolitical tensions in the Middle East between Qatar and the other Petromonarchies, the main reason is that the real global economic activity is slowdowning. As chance would have it, U.S. consumption trend, which determine 2/3 of its GDP – is weak.
It was a volatile month of trading in May for the oil traders as the prices weakened during the early part of the month, then strengthened in the lead up to the OPEC meeting and then weakened again towards the end of the month as the OPEC once again sought to extinguish any sort of hopes that the market had, over the increasing oil prices. All of this action happened within one month and to some investors and traders, this should come as a relief after the stalemate that we had seen in the first couple of months of this year when the oil prices ranged and consolidated without moving much in any specific direction. Last month was all about the OPEC meeting that came about in the third week of the month. The oil prices had a deep fall during the first week of the month as the production and inventory data continued to show a buildup and this was not in the plans of the OPEC and the other producers who were hoping to see their production cut have an effect on the supply which would in turn help to keep pushing the oil prices higher and higher. None of this happened during the first week of the month of May and the oil buyers were scraping the bottom at the $44 region. But better news was to follow as reports began to flow in saying that the OPEC members are likely to agree on a much longer and a much deeper production cut in their meeting towards the middle of the month. More and more such reports began to emerge and Saudi Arabia and Russia also added fuel to the fire by commenting things similar to that effect and also not denying any such report. This increased the market expectations and the bulls showed their thumbs up for these reports by indulging in a lot of buying. As is usual for the markets, the traders clearly overran the reports and the actual meeting and by the time the meeting began in the third week of May, the oil prices had jumped from the depths of $44 to push through $50 and then make its way as far high as the $52 region. It was a clear case of over enthusiasm from the markets and in such cases, it ends up in a lot of tears and that’s what we say. The meeting did go through as planned but the announcements following the meeting were anywhere near as planned. The OPEC members announced an extension of the production cut deal to 9 months which would take the deal through to the end of the year but they did not announce any extra cuts of any sort. This largely disappointed the markets and the oil contracts began to sell off. This pushed the oil prices through the important psychological mark of $50 and the prices ended below that figure for the month of May. We also began to have reports saying that the Russians were comfortable with low oil prices and this basically left the oil prices at the mercy of the incoming production and inventory data. Technically, the break below the $50 mark is an important event which shows that the bears are dominating the scene as far as oil prices are concerned. It is likely to take a lot of effort from the bulls to break back through this region and that is something that is unlikely to happen in the short term as we saw multiple attempts to break through that region, end up in failure during the end of the month of May. We can expect the supports to come in at around the $47.5 region and then the $44 region and if the oil prices do go below even this, then there is not much to save it. Looking ahead to the month of June, we expect the production and the inventory data to dominate how the prices move during the course of the month and with these not showing any signs of thawing; the outlook for oil prices continues to be bearish. The production from Libya continues to be very high and the inventory data from the US also remains high and a combination of these is likely to keep the oil prices under pressure despite the production cut deal continuing through the month of June. The latest developments in the Middle East between Qatar and Saudi Arabia and company is likely to help to keep the oil prices well bid but it remains to be seen whether just this development would be enough to keep it afloat for the rest of the month.
Crude oil prices started April in the midst of a strong uptrend that continued into mid-month. The move ended after with a dramatic technical reversal at the end of six day winning streak. The rally was primarily driven by aggressive hedge and commodity fund buying as money managers continued to increase bullish bets on a crude oil short-fall. The catalyst behind the buying was growing compliance with the OPEC-led plan to cut production, trim the global supply and stabilize prices. Traders primarily ignored signs of increasing U.S. production as rumors began to surface that OPEC and other non-OPEC producers were strongly considering an extension of the program to limit output beyond the June deadline. Crude oil began easing from its high at $54.14 on April 12 as rising U.S. shale oil production offset concerns over geopolitical tensions in the Middle East and output cuts being made to support prices. U.S. crude inventories also touched record highs at both the U.S. storage hub at Cushing, Oklahoma and in the U.S. Gulf Coast. In addition, the U.S. rig count continued to increase throughout April, setting a bearish tone for increased production into the future. Heaving selling on April 19 signaled massive hedge and commodity fund liquidation with the market dropping nearly 4% in one session. This also set in motion a sell-off that eventually drove prices to $49.20 before settling the month at $49.33, down $1.74 for the month or -3.41%.