In October, oil prices significantly increased to around $4-5/b similar to what occurred in September too. In particular, Brent North Sea quality opened at $56.10/b and closed at $61.18/b, while West Texas Intermediate opened at $50.90/b and closed at $54.88/b. Thus, on October 27th, Brent overcame the threshold of $60/b for the first time in more than two years.
The price gap between the European and Asian benchmark and the American reference, which has been persisting at around $5-6/b, is almost entirely the consequence of the hurricanes in the Unites States, whose main effect was to decrease the refinery demand so, the WTI price. Moreover, it is interesting to put into light that this price spread determined an increase in the U.S. crude exports, which reached 2,000,000 b/d at the beginning of the month.
If we exclude on October 6th, when both qualities touched their monthly low respectively, pricing $55.52/b and $49.23/b as oil kept on ships in the North Sea rose by nearly 3,000,000 barrels to just over 5,400,000 barrels, the upward trend of prices was fundamentally steady during the entire month due to the following reasons:
1. The U.S. tight oil growth production seems to be slower than previously estimated. In fact, according to the data provided by the Energy Information Administration on September 30th, the U.S. Federal energy experts reviewed the fall of 178,500 b/d of July’s output, and of approximately 220,000 b/d of June’s production;
2. Global stocks are decreasing. Especially, since the beginning of 2017, the U.S. inventories have decreased by 17,000,000 barrels, while in 2016 they increased by 21,000,000 barrels.
3. The geopolitical difficulties with some OPEC producers as Libya and Venezuela with the addition of the fighting between Baghdad and the Kurdish Regional Government in the Iraqi oil city of Kirkuk, on October 16th;
4. In 2017, oil demand is forecast to grow by 1,600,000 b/d;
5. Based on Bloomberg, U.S. President, Donald Trump, is ready to appoint Jerome Powell as the successor of current FED Governor, Janet Yellen whose term as Chair will end in February 2018. Powell, who is currently a member of the Federal Reserve Board of Governors, will guarantee the continuity of a monetary policy based on a gradual increase in the U.S. interest rates.
In the wake of this news, the dollar depreciated over the euro, moving from 1.1785€/$ on October 25th to 1.1638€/$ on October 31st.
Waiting for the next OPEC meeting on November 30th, the financial difficulties (profitability) that the North American frackers are facing in addition to the willingness of both the Saudis and the Russians, to extend the 2016 November agreement to the entire 2018 may contribute to sustain and stabilize the current barrel prices.
The Russian Federation and Saudi Arabia have each earned $40,000,000,000 from the 2016 deal, said Kirill Dmitriev, CEO of the Russian Direct Investment Fund. International efforts to stabilize oil prices “have been fruitful, bringing oil prices to above $55 per barrel”, Dmitriev told Rossiya 24 news channel. “We believe that without this deal [that will expire on March 31st 2018], prices would be below $35 per barrel now”, he added.
In September, oil prices significantly increased at around $4/b. In particular, Brent North Sea quality opened at $52.75/b and closed at $56.68/b, while West Texas Intermediate opened at $47.34/b and closed at $51.54/b.
The European/Asian benchmark and the American reference reached their monthly high respectively, on September 25th – quoting at $59.24/b, a record high in the last 26 months – and on September 26th – pricing at $52.40/b, the maximum for the last two years – in the wake of the independence referendum held in the Iraq’s Kurdish region, the result of which clearly showed the will to separate from Baghdad.
As a consequence of this geopolitical tension, Turkish President, Recep Tayyip Erdogan, threatened to cut off the pipeline from northern Iraq’s Kurdish autonomous region to Turkey, which pumps approximately 600,000 b/d, while Baghdad called for an international boycott of Kurdish oil sales.
In addition to this specific, but temporary issue, three factors explain the bullish trend of barrel prices. In particular:
1. Demand – According to the data provided by the International Energy Agency on September 13th, oil demand is estimated to grow by 1,600,000 b/d in 2017 (revised upward for the third month in a row), reaching 97,700,000 b/d (+1.7% y-o-y).
The OPEC Monthly Oil Market Report published on September 12th confirmed this increasing trend even if for a lower amount. In fact, 2017 world oil demand growth is forecast to rise by 1,420,000 b/d (revised upward by 50,000,000 b/d);
2. Stocks – Based on the data provided by the Weekly Petroleum Status Report published by the Energy Information Administration on September 22nd, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1,800,000 barrels from the previous week;
3. Exports – In accordance with the Monthly Energy Information Administration Report, OPEC oil export decreased by 1,300,000 b/d between July and August.
Looking deeper into the September oil trend, the WTI decrease seen between September 8th/12th was directly related to the consequences of the exceptional atmospheric events, which happened in the Mexican Gulf in August. In fact, Goldman Sachs analysts predicted that the combined refiner demand loss, as a result of the hurricanes would total about 900,000 b/d in September and 300,000 b/d in October, a “bearish shock for global oil balances”.
In the aftermath, the recovery of WTI price was slower than that of Brent, probably because the U.S. frackers, having sold their forward production (hedging), slowed down the bullish tendency. As a matter of fact, the American quality clearly overcame the threshold of $50/b after the EIA published that the U.S. oil exports reached 1,500,000 b/d.
In its conclusion, the Oil Market Report put into light that “Based on recent bets made by investors, expectations are that markets are tightening and that prices will rise, albeit very modestly”. On September 26th, FED Governor, Janet Yellen, in the course of the last Federal Open Market Committee expressed her concerns with regard to the overestimated calculation of U.S. inflation and unemployment rate. Therefore, there is a high probability that the increasing of U.S. interest rates – currently, between 1/1.25% – will slow down in the next few months.
Will the North American frackers grab this opportunity or has the Energy Information Administration been overestimating 2017 U.S. crude oil production too as Continental Resource’s chief executive, Harold Hamm, pointed out?
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.