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Rising oil prices, up to the highest levels since mid-2015. Trends in light of the 2018 extension of the OPEC / non-OPEC agreement signed in November 2016 and expiring on March 31, 2018

In November, oil prices increased, advancing to their highest levels since mid-2015. In particular, Brent North Sea crude quality opened at $60.44/b and closed at $62.71/b, while West Texas Intermediate blend opened at $54.27/b closing at $57.45/b in the wake of the extension of the November 2016 OPEC/non-OPEC agreement through to end of 2018, which should have expired on March 31st 2018. At the time of writing, Brent was trading at $62.81/b and WTI at $57.10/b.

In addition, the bullish monthly trend of oil was the consequence of different factors, among which:

1. According to the estimates provided by the Oil Market Report, OECD industry stocks fell by 40,000,000 barrels in September. For the first time in two years, global inventories dropped below 3 trillion barrels (63,000,000 barrels in 3Q17);

2. Despite the fact that the U.S. crude output reached 9,682,000 b/d (weekly forecasts), surging by 15% since mid-2016, WTI price also reached its peak at $58.81/b on November 24th, due to the closure of the Keystone pipeline, which connects Canada’s oil sand fields with the United States of America, following a spill. Keystone’s capacity is 590,000 b/d;

3. The steady depreciation of the dollar;

4. The so-called Chinese Black Fiscal Friday. Starting from December 1st 2017, China will cut the tariffs of 187 imported consumer goods. The tariffs of alimentary, pharmaceutical, cosmetic and clothes goods will lower from the current average of 17.3% to 7.7%. In accordance to the economic and financial newspaper MF Milano Finanza, "this is one of the effects of Trump’s trip in Asia";

5. The geopolitical tensions in the Middle East.

In November, the dollar depreciated over the euro. Notably, the green banknote opened at 1.1612 €/$ and closed at 1.1849 €/$, reaching 1.1952€/$ on November 27th, the lowest since September 4th (1.206 €/$).

Meanwhile, the U.S. currency was quite stable over the rouble. If we exclude a short depreciation of the Russian currency in mid-November, which lead to 60 rouble/$, it traded slightly over 58 rouble/$.

According to the Russian Central Bank, the 2017 Gross Domestic Product of the Russian Federation will grow by 1.5%, while current inflation has fallen to 2.5%, strongly below the 4% government target. Thanks to these data, the Central Bank cut the key interest rate (per annum) to 8.25%.

Based on the World Gold Council, the Russian Federation is the largest gold buyer and the world’s third-biggest producer. As of November, it had 1.801 t of gold accounting for 17.3% of all reserves while, during the second quarter of 2017, the Russian Central Bank accounted for 38% of all gold purchased by Central Banks.

In accordance with Gold.org data, since Putin’s election as President at the end of 1999, Russian gold reserves have increased more than 5 times from 343 t.

Latest data and estimates on oil & gas

According to the estimates provided by the Oil Market Report published by the International Energy Agency on November 14th, world oil supply increased by 100,000 b/d in October to 97,500,000 b/d due to the combination of higher flows from non-OPEC countries and lower supplies from Algeria, Iraq, and Nigeria (OPEC output -80,000 b/d to 32,530,000 b/d). Instead, in comparison with a year ago, global production decreased by 470,000 b/d.

Global oil demand growth has been revised down by 100,000 b/d in 2017 and in 2018. In particular, with regard to the current year, it will increase by 1,500,000 b/d (+1.6%) reaching 97,700,000 b/d, while in 2018 it will rise by 1,300,000 b/d (+ 1.3%) to a total of 98,900,000.

Based on the figures of the Drilling Productivity Report published by the Energy Information Administration on November 13th, the American unconventional output is expected to increase by 80,000 b/d to 6,174,000 b/d in December.

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 9,682,000 b/d, which was reached on November 24th 2017 (weekly forecasts).

According to the data provided by Baker Hughes on December 1st, the 929 current U.S. active rigs, of which 749 (80.6%) are oil rigs and 180 (19.4%) are gas rigs, were 31 more in comparison with the data published on November 3rd due to the increasing in oil prices.

In September 2017, the U.S. crude oil imports significantly decreased at 7,275,000 b/d. They were 7,890,000 b/d in August, 7,825,000 b/d in July, 8,010,000 b/d in June, 8,397,000 b/d in May, 8,131,000 b/d in April, 8,048,000 b/d in March, 7,890,000 b/d in February and 8,435,000 b/d in January (a record since August 2012).

Now, the current 2017 U.S. average crude oil imports of 7,989,000 b/d are higher than the 7,877,000 b/d marked during 2016, which is on the rise if compared with the 7,344,000 b/d imported in 2014 and 7,363,000 b/d in 2015.

Based on the data published by the China General Administration of Customs, in October, Russia was the first Chinese oil supplier for the eighth month in a row, exporting 4.649 million t, more than 1,000,000 b/d. The second exporter with an amount close to Russia is Saudi Arabia and the third is Angola. However, at the beginning of the decade, the Saudi share of Chinese crude imports was approximately 20%, while Russia’s was below 7%.

Geopolitics of Oil & Natural Gas

On November 30th 2016, OPEC, the Russian Federation and other oil producers decided to cut the output by approximately 1,800,000 b/d for the first half of 2017 with the aim of pushing prices close to $60/b. On June 30th, they prolonged the agreement until March 31st 2018 and, on November 30th 2017, they extended it for the entire 2018, adding that the combined production of Nigeria and Libya – initially exempted from the deal – will not exceed 2,800,000 b/d (equal to their current output).

Taking into account that the oil market is still characterized by an oversupply, the second extension of the 2016 November agreement – if fully implemented in 2018 – will certainly bring the market again into balance with prices that are forecast at around $60/b.

Based on the data provided by the 2017 International Monetary Fund Outlook, currently the majority of the OPEC countries – after having rescaled their State budgets – have a breakeven price close to the IMF estimates.

To be more specific, there are countries – such as Kuwait ($46.5/b), Qatar ($46.8/b), but also Iraq ($54.1/$) and Iran ($54.7/b) – which have a 2017 fiscal break even oil price that is clearly lower than $60/b. Others, such as Algeria ($63.8/b) and the United Arab Emirates ($68/b) have a target that is slightly higher than the IMF’s forecasts, while Saudi Arabia ($73.1/b) would need a higher price (it was $96.6/b in 2016), as Libya ($102/b) too. Among the non-OPEC producers, Russia’s budget is fixed at $40/b.

From a strictly geopolitical point of view however, the impression is that the Russian President, Vladimir Putin, is also one of the most important influential player in the Organization of the Petroleum Exporting Countries after having obtained the victory in the Syrian war, which created the preconditions for the 2016 November agreement. On December 3rd, Romano Prodi wrote an article for the newspaper Il Messaggero in which he emphasized the “masterpiece‘, of the Russian President in the oil war: From a strictly geopolitical point of view however, the impression is that the Russian President, Vladimir Putin, is also one of the most important influential player in the Organization of the Petroleum Exporting Countries after having obtained the victory in the Syrian war, which created the preconditions for the 2016 November agreement. On December 3rd, Romano Prodi wrote an article for the newspaper Il Messaggero in which he emphasized the "masterpiece", of the Russian President in the oil war: "Although Russia is not an OPEC member, at the recent OPEC meeting in Vienna Putin accomplished his goal of getting all the participants to commit themselves to limiting output so that prices can be set at a level (around 60 $/b) thought by experts to provide long-term equilibrium between producers and consumers. [.....]. The proposed price should secure a reasonable balance of interests among the major parties to the Vienna agreement while also satisfying the United States, since some of the most efficient shale gas and shale oil producers [tight] can re-enter the market.

 

However, as Nick Cunningham questioned on Oilprice.com, "will U.S. shale spoil these plans?"

Waiting for an answer during the next months, the Russian giant natural gas producer, Gazprom, is close to reaching another record high. In fact, after the peak of 179.3 Gmc3 of gas exported in Europe (including Turkey) in 2016, as of November 22nd, it delivered 170 Gmc3 to the European consumers, exceeding the amount exported in the same period of 2016 by 13.3 Gmc3. In order to obtain its goal, Gazprom developed new infrastructures. Among them is the Nord Stream pipeline, which transmitted its 200 Gmc3th of natural gas from Russia to Germany via the Greifswald delivery point on November 30th.