Despite the agreement to raise oil output by 1,000,000 b/d achieved by the so called OPEC+ group during their meeting in Vienna on June 22nd/23rd, barrel prices increased. In particular, WTI benchmark gained at around $7.5/b.
Brent North Sea quality opened the negotiations at $76.76/b and closed at $77.75/b, while West Texas Intermediate opened at $65.75/b, closing at $73.34/b (the highest since 2014). Both the European and Asian benchmark and the American grade reached their monthly low on June 18th, respectively quoting $73.03/b and $64.15/b.
Presumably, the oil production will increase by 700,000 b/d, because some OPEC members as Iran, Venezuela, Libya – which output decreased from 1,000,000 b/d to 750,000 b/d in May – and Nigeria will not be able to increase their extractions due to issues related with sanctions, economic crisis and geopolitical turmoil.
In reality, the current barrel output is lower than that fixed in November 2016, so the 1,000,000 b/d increase would approximately bring it back to the agreed cap.
The increasing in price by the two most important global oil benchmarks has been characterized by a different intensity. In fact, WTI strongly rose because of the following reasons:
1. The U.S. commercial stocks bearish tendency. In particular, U.S. crude inventories dropped from 436,584,000 barrels on June 1st to 416,636,000 barrels on June 22nd.
“The spread between WTI and Brent is shrinking as OPEC’s output increase is having a bigger impact on Brent than WTI”, said Hong Sungki, a commodities trader at NH Investment & Securities Co. “Cushing stockpiles are quickly withdrawing as the U.S. summer driving season boosts refiners’ demand for crude, supporting WTI prices”;
2. In Canada – owing to a failure in the Syncrude facility, which is linked to the Cushing oil stock terminal in Oklahoma, the most important WTI delivery point in the United States of America – supply could fall up to at least 360,000 b/d, till next August.
Before the OPEC+ meeting, Iranian Oil Minister, Bijan Namdar Zangeneh, said it was likely to reject any agreement that raised output from the group. Taking into account that Iran will be unable to increase its extractions in the coming months, probably his aim was to pursue the other OPEC + members not to boost their per head production above the 2016 November limits thus, avoiding to grab Iran’s oil market share. However, from a strictly political point of view, Iran may only rely on Russian Federation’s support – which output, according to Interfax, already reached 11,090,000 b/d during the first week of June, 143,000 b/d higher than the cap agreed with OPEC in late 2016 – while the United States of America are explicitly pushing Saudi Arabia to boost its output by 2,000,000 b/d.
Probably, U.S. President, Donald Trump, who seems to be so eager in resolving a range of diplomatic disputes with his Russian counterpart, Vladimir Putin, will face the above mentioned issue during the bilateral meeting that will take place on July 16th, in Helsinki.
In May, the oil price gap between the two most important benchmarks exceeded 11 $/b – that is a record high in three years – due to the Iranian crisis and the increase in U.S. tight production. In particular, Brent North Sea quality opened the transactions at $73.37/b and closed at $77.62/b, while West Texas Intermediate opened its negotiations at $67.47/b, closing at $66.69/b.
On May 23rd, the European and Asian benchmark reached $79.71/b, the highest since November 2014, whereas the American grade hit its maximum at $72.63/b on May 21st.
The strong bullish barrel trend, which occurred during the first three weeks of the month, was the direct consequence of factors dealing with geopolitics and oil supply:
1. On May 8th, the President of the United States of America, Donald Trump, declared the withdrawal of his country from the Joint Comprehensive Plan of Action regulating Iran’s nuclear activities and the reintroduction of sanctions against Teheran.
With regard to the crude market, it means that between 200,000 b/d and 1,000,000 b/d of Iranian oil exports are estimated, by analysts, to be at risk. At the moment, Iran is exporting 2,400,000 b/d;
2. On May 18th, for a second week in a row, the U.S. commercial stocks decreased from 435,955,000 barrels to 432,354,000 barrels;
3. At the same time, according to a Barclays report, the Venezuelan crude output may fall below 1,000,000 b/d in the coming months from an April level of 1,500,000 b/d;
4. On May 22nd, following the re-election of President Nicolas Maduro, D. Trump imposed sanctions over Venezuela too. In particular, the U.S. President prohibited the West financial system to purchase Venezuela’s debt, including Petroleos de Venezuela SA, the Latin American nation’s state-owned oil company.
During the last week of May, barrel prices decreased due to the following issues:
1. Hedge funds cut their net-long positions (purchase). According to the ICE Futures Europe, on May 21st, they reduced their Brent net-long positions by 3.7% to 548,555 contracts. At the same time, based on the U.S. Commodity Futures Trading Commission, the WTI net-long positions dropped by 6.2% to 385,283 agreements;
2. On May 25th, the U.S. crude inventories rose from 432,354,000 barrels to 438,132,000 barrels.
Based on the data provided by the International Energy Agency, OPEC and non-OPEC producers – after having started their supply cuts in January 2017 – achieved their goal to wipe out the global oversupply, with inventories falling by 1,000,000 stocks below their five-year average for the first time since 2014.
During the International Economic Forum (SPIEF) that took place in St. Petersburg from May 24th to 26th, the President of the Russian Federation, Vladimir Putin, stated, “we’re not interested in an endless rise in the price of energy and oil. If you asked me what a fair price is, I would say we’re perfectly happy with $60/b”. Anything above that price, “can lead to certain problems for consumers, which also isn’t good for producers. What will happen next will depend on the Iran nuclear deal and how that affects the world energy market”.
In April, oil prices strongly increased in the wake of the OPEC/non-OPEC deal cuts. Especially, according to the International Energy Agency data, OPEC’s compliance reached a record of 164% in March compared with a revised (on the rise) 148% in February, while compliance for the 10 non-OPEC nations in the agreement rose to 85% last month from a revised 78% in February.
Brent North Sea quality opened the transactions at $68.18/b and closed at $74.70/b, whereas West Texas Intermediate grade started the negotiations at $63.62/b, closing at $68.45/b.
On April 6th, both the European and Asian benchmark and the American reference touched their monthly low, respectively pricing $66.89/b and $61.63/b, due to the dollar appreciation (1.2234 €/$).
On April 23rd, both blends reached their monthly high, Brent quoting $75.04/b – the maximum in four years – and WTI trading at $68.90/b – record high since December 2014 – after Iranian-backed Houthis in Yemen launched unsuccessful missile attacks against Saudi Arabia, while kingdom-led forces killed a senior leader of the so-called rebel group. At the same time, the global benchmark crude traded at a $6.14/b premium to June WTI, the widest since January 2018.
In April, the oil market was characterized, as both bullish and bearish factors.
Among the latter:
1. Based on the Energy Information Administration data, the U.S. oil output exceed 10,500,000 b/d (weekly figures);
2. In accordance with the EIA estimates, the U.S. crude oil stocks unexpectedly increased from 425,332,000 barrels on March 30th, to 429,737,000 barrels on April 20th;
3. The dollar appreciated. In particular, over the euro, the green banknote opened at 1.2308 €/$ on April 3rd and closed at 1.2079 €/$ on April 30th (the maximum appreciation being 1.2070 €/$ on April 27th).
With regard to the bullish factors, which overshadowed the bearish ones in determining barrel price trends, we put into light the following:
1. At the moment, oil inventories in OCSE nations are just 30,000,000 barrels above their five-year average. There were more than 300,000,000 barrels above the level when OPEC and non OPEC producers started their cuts, on January 1st 2017. The total amount of OCSE petroleum inventories decreased to 2,841,000,000 barrels;
2. The concerns about a possible trade war between the United States of America and China;
3. The double U.S. attack over Syria occurred on April 14th and 30th;
4. The tensions about the Iran nuclear talks after the meeting between the U.S. President, Donald Trump, and French President, Emmanuel Macron, on April 24th.
“The oil markets are very much linked to geopolitical tensions, especially if they’re in the Middle East, the heart of global oil exports”, Fatih Birol, the executive director of the IEA, said on Bloomberg television. “If tensions continue, they will continue to have an impact on the oil market and prices. Definitely, this will be a reason to push the prices up”.
Taking into account that the rebalancing of the oil market is close to be achieved, the historic deal that has been carrying on between North and South Korea may contribute to a de-escalation of the international tensions and hopefully of barrel prices too.
In March, oil prices strongly increased (over 5%) in the wake of the OPEC/non-OPEC agreement cuts – with compliance reaching 138% in February – due to the global trade tensions raised between the United States of America, China and the European Union. Especially, Brent North Sea quality opened the negotiations at $64.15/b and closed at $69.67/b, while West Texas Intermediate grade opened at $61.34/b, closing at $65.14/b.
On March 23rd, despite the U.S. crude production reaching 10,407,000 b/d – a record high since 1970 – both Brent and WTI hit their monthly maximum, quoting $70.36/b and $65.80/b respectively. Three simultaneously factors could explain the bullish barrel trend, which occurred during the last 10 days of the month.
In particular, on March 21st:
1. After having surged by 5,220,000 barrels as refineries head into seasonal maintenance, the U.S. crude stockpiles unexpectedly fell by 2,622,000 barrels, the largest drop since early January 2018. According to the data provided by the Energy Information Administration, it decreased below the five-year average for the first time since 2014, On March 28th, U.S. crude inventories increased again by 1,640,000 barrels, widening the Brent/WTI price gap over $5/b;
2. The Governor of the Federal Reserve, Jerome Powell, stated, “The labor market has continued to strengthen and that economic activity has been rising at a moderate rate”. The U.S. Gross Domestic Product rose by +2.5% during the IV quarter of 2017. For these reasons, the FED decided to increase its interest rates by 25 basis points to 1.50/1.75%;
3. The meeting between U.S. President, Donald Trump, and Saudi Prince, Mohammed Bin Salman, sparked tensions concerning the possible renewal of the Iranian crisis. Based on FGE, any resumption of unilateral U.S. sanctions against Iran could lead to a drop in its oil exports by 250,000 b/d to 500,000 b/d by the end of this year. In addition, the nominee of John Bolton – who was against the Iranian nuclear agreement – as National Security Advisor had a bullish impact on prices too.
In February, OECD inventories dropped to around 44,000,000 barrels above the five-year average. In January 2017, at the beginning of the OPEC/non-OPEC deal, there were 293,000,000 barrels above that level therefore, at the current conditions, the oil market will be rebalancing between the II and the III quarter of 2018.
However, Bloomberg correctly pointed out “years of excessively high supplies mean that measure is itself higher than normal, while the patchy nature of data outside the OECD makes it difficult to get an accurate picture of the entire world market”.
In February, oil prices strongly decreased by approximately $5/b. In particular, on February 1st, North Sea Brent and West Texas Intermediate quoted at $69.75/b and at $66.01/b respectively. On February 28th, the European and Asian benchmark priced at $64.66/b, while the American blend traded at $61.55/b.
On February 13th, both qualities reached their monthly low, Brent listing at $62.60/b and WTI at $58.87/b. This bearish trend was the consequence of the following economic and financial factors:
1. In the week ending January 30th, the short net speculative positions (selling) increased by 6.3% to 39,127 contracts;
2. During the first week of February, the total number of U.S. active rigs grew by 29 facilities;
3. On February 8th, the dollar appreciated over the euro, quoting at 1.2253 €/$;
4. On February 9th, the U.S. output surged to 10,271,000 b/d. International Energy Agency Executive Director, Fatih Birol, said “explosive growth” in U.S. oil output might extend beyond this year.
During the second part of the month, prices rose because of:
1. A weaker greenback. On February 15th, the euro/dollar exchange rate priced at 1.2493 €/$, which boosted the appeal of the commodities priced in the U.S. currency;
2. The drop in OCSE countries oil inventories;
3. The increase in the American oil exports, which reached approximately, 2,000,000 b/d, the most since October 2017;
4. On February 23rd, the production at Libya’s El-Feel well halted (-70,000 b/d) after protests disrupted its production.
At the end of the month, a new appreciation of the dollar, which reached its monthly maximum over the euro (1.2214 €/$ on February 28th), in addition to the rise in the U.S stocks (+3,020,000 barrels during the next week) supported a drop in prices.
On February 12th, United Arab Emirates Energy Minister, Suhail Al Mazrouei, currently the president of OPEC, said, “Shale is coming and the expectation is that it will come stronger than in 2017, and this is something that we have to watch. But considering all factors, I don’t think it will be a huge distorter of the market”.
As envisaged by Bloomberg on February 18th, OPEC’s real problem is whether it can ever adequately count inventories outside the developed OECD countries, which they already use over half of the oil consumed worldwide and are expected to account for 80% of the demand growth in 2018.
Probably, for this reason Saudis Oil Minister, Khalid A. Al-Falih, stated on February 19th, “If we have to overbalance the market a little bit, then so be it”.