Oil Market Review

Monthly Review

  • September 2018

    In August, oil prices surged. In particular, Brent North Sea quality opened the negotiations at $72.53/b and closed at $77.8/b, while West Texas Intermediate began the transactions at $67.79/b, concluding at $70.01/b.
    During the first half of the month, both Brent and WTI traded close to a 10-week low, because of the following reasons:

    1. China’s retaliation against the U.S. latest economic measures increased tensions between the two economic superpowers, which can affect future oil demand;
    2. The strong devaluation of the Turkish currency that could lead the country to a recession, which may affect oil demand too;
    3. According to the Oil Monthly Report published by the International Energy Agency on August 10th, “concerns about the stability of oil supply have cooled down somewhat, at least for now. We have seen increases in production, mainly in Saudi Arabia and Russia and a partial, but fragile recovery in Libya”.
    4. Based on the U.S. Energy Information Administration, U.S. crude stockpiles increased by 6.810.000 barrels, moving from 407.389.000 barrels to 414.194.000 barrels.

    Especially, the European and Asian benchmark lowered to $70.83/b on August 15th, whereas the American grade touched $64.83/b the day after.
    On the contrary, during the second half of August, barrel prices strongly increased due to the subsequent issues:

    1. The fall in Iranian exports, which decreased from 2.320.000 b/d in July to 1.680.000 b/d (Platts preliminary estimates) in mid-August, in addition to the strikes at Total’s fields in the North Sea that could also curb supply;
    2. The fall in U.S. commercial stockpiles, which decreased from 414.194.000 barrels to 405.792.000 barrels
    3. The depreciation of the dollar, which makes dollar-priced assets more attractive for the investors. In particular, the American currency depreciated over the euro, moving from 1.1321 €/$ on August the 15th to 1.171 €/$ on August 28th.

    With regard to the Iranian oil exports, it is important to highlight that India’s imports from the Persian country decreased from 700.000 b/d in July to the current 200.000 b/d, because of fears regarding the so-called U.S. secondary sanctions.
    On the contrary, China – which is the first Iranian oil purchaser (India was the second) – did not reduced at all its imports from Teheran, whereas the first oil delivery to China through the petro-yuan settlement is set for September.

    by Demostenes Floros
  • August 2018

    In July, barrel prices significantly decreased. In particular, Brent North Sea quality opened the negotiations at 77.4 $/b and closed at 74.2 $/b, while West Texas Intermediate opened the transactions at 74.03 $/b, closing at 67.45$/b.

    Both the European and Asian benchmark, and the American grade reached their monthly high on July 10th, respectively quoting 78.88 $/b and 74.16 $/b (close to the highest in three years). As highlighted by the International Energy Agency,  this could be due to fears that the supply increase decided by the OPEC + group on June 23rd would not be enough to counterbalance the losses from Venezuela and Iran. In fact, according to IEA, Venezuela’s production capacity could drop by 1,000,000 b/d by the end of 2018 (- 40%). Parallely, Iranian shipments to Europe have already fallen by 50%, because of U.S. sanctions.

    Furthermore, on July 11th, geopolitical tensions rose when U.S. President, Donald Trump, with regard to natural gas supplies, stated that Germany is “captive” to Russia. In reality, Germany isn’t any more dependent on Russian gas than it was before. Nowadays, the Russian Federation accounts for approximately 40% of Germany’s gas imports, but the share was even higher during the Cold War (West Germany).

    In addition, the United States imported an average of 384,000 b/d of crude oil and products (3.8% of total imports) from Russia in 2017.

    Based on Oilprice.com, assuming an average price of $50/b, it means that the U.S. spent about $7 billion on Russian oil in the previous year. 

    Halfway through July, both oil quality prices decreased, respectively lowering to 71.6 $/b and 67.64 $/b on July 17th, because of the following issues:

    1.   Libya, Nigeria and Canada were able to increase their output;

    2.   The trade war between the U.S. and China might negatively affect oil demand during the second half of the current year.

    At the end of the month, the price-gap between Brent and WTI increased by more than 6.5 $/b probably because Saudi Arabia’s suspension of shipments through a key Red Sea transit route. This affected the European and Asian benchmark more than the American blend.

    After the withdrawal of the United States of America from the Iran nuclear deal, which was reached in 2015, U.S. President D. Trump, on July 31st, stated that he would be willing to meet Iranian President, Hassan Rouhani, with “no preconditions”.

    In the wake of the Trump/Putin meeting, which occurred in Helsinki in mid-July, the impression is that geopolitics could have a bearish effect on barrel prices during the second half of 2018. “I would certainly meet with Iran if they wanted to meet”, Trump stated on July 30th, during a joint press conference at the White House with Italian Prime Minister, Giuseppe Conte. Trump was also quoted saying, “I don’t know if they’re ready. They’re having a hard time”.

    by Demostenes Floros
  • July 2018

    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.

    by Demostenes Floros
  • June 2018

    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”.

    by Demostenes Floros
  • May 2018

    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.

    by Demostenes Floros