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”.
During the first month of 2018, oil prices rose because the Organization of the Petroleum Exporting Countries – headed by Saudi Arabia – and the non-OPEC crude producers – led by the Russian Federation – complied with their output limits at a rate of 125% in December, up from 122% a month earlier. Particularly, Brent North Sea quality opened the negotiations at $66.57/b and closed at $69.05/b, while West Texas Intermediate blend opened at $60.37/b, closing at $64.73/b.
On January 24th, the European and Asian benchmark reached $70.75/b, its record high since December 2014, whilst the American reference priced $66.12/b on January 26th, its highest in 37 months. The light decrease in barrel prices, which occurred during the last week of January, was due to the increase in U.S. rigs (11) and U.S. stocks (6,780,000 barrels) the latter, for the first time since November 2017.
The bullish monthly trend of oil was the consequence of different economic and geopolitical factors, among which:
1. According to the data exposed by the International Monetary Fund on January 23rd during the Forum in Davos (Switzerland), world economy will rise by 3.7% in 2018, supporting oil demand growth too. In fact, based on the figures issued by the International Energy Agency on January 9th, global oil demand is forecast to rise by 1,700,000 b/d, both in 2018, and in 2019, after having increased by 1,400,000 b/d in 2017.
2. Based on the weekly data published by the U.S. Energy information Administration, the American crude stockpiles shrank from 424,462,000 barrels on December 29th 2017 to 411,583,000 barrels on January 19th 2018, the lowest level since February 2015, as refiners boosted operating rates to the highest level in more than a decade. Especially, U.S. inventories fell for 10th week in a row in the longest stretch of declines on record, dropping to their lowest since December 2014. Then, American crude in storage tanks and terminals jumped by 6,780,000 barrels on January 26th.
OECD commercial inventories dropped as well, falling from 137,000,000 barrels to 133,000,000 barrels above the 5-year average.
3. In accordance with the figures shown by the Commodity Futures Trading Commission, the hedge funds increased their WTI net-long speculative position by 2.9% to 496,111 futures and options contracts during the week ended on January 23rd, the highest level since 2006.
At the same time, the Brent net-long speculative positions rose by 2.4% to 584,707 contracts, which is an ever record-high.
4. According to the Bloomberg Spot Dollar Index, the U.S. dollar dropped for a 7th straight week, the longest stretch of declines since 2010.
5. Last, but not least, with regard to geopolitics, the turmoils occurred at the beginning of the year in Iran, which is OPEC’s third-largest oil producer, in addition with Venezuela’s economic problems, that are affecting its extractions and exports, supported the barrel prices too. Especially, in the Latin American country, oil production reached 1,160,000 b/d in December, the lowest level in 30 years.
The depreciation of the dollar, in addition to the bullish speculative role played by hedge funds, contributed to the strong recovery of the American blend, with the consequence that the Brent/WTI price-gap narrowed to approximately $4/b at the end of January, the lowest since August 2017.
Despite the recent price gains, will the output cuts decided by OPEC and non-OPEC producers in November 2016 and prolonged in November 2017 continue until the end of the current year or will they stop in mid-2018 due to the achievement of the market rebalancing as some rumors hinted?
On January 13th, Iraqi Oil Minister, Jabbar al-Luaibi, stated, “There are some sources here and there indicating that the market is flourishing now, the prices are healthy, so let’s talk about terminating the freeze. This is the wrong judgment, and we don’t agree with such a concept”.
Let’s wait and see!