In December, oil prices rose in the wake of the extension of the OPEC/non-OPEC deal, which increased the compliance with the output cuts to 115% in November, bringing the 2017 average compliance to 91%. In particular, Brent North Sea quality opened the negotiations pricing at $63.70/b and closed at $66.62/b – that is a record high since May 2015 – while West Texas Intermediate opened at $58.36/b, closing at $60.25/b – the highest level since June 2015.
On December 6th, both the European and Asian benchmark and the American blend reached their monthly low, respectively quoting $61.26/b and $55.97/b. According to the data published by the US Energy Information Administration, despite a drop in U.S. crude stocks by 5,600,000 barrels, the Distillate Fuel Oil inventories piled up by 1,700,000 barrels and the Total Motor Gasoline stocks accumulated by 6,800,000 barrels with the consequence that some hedge funds sold off their positions.
The different financial and geopolitical issues that supported the bullish barrel price trend were the followings:
1. On December 11th, the North Sea Forties Pipeline System (FPS) closed due to a crack. FPS has been operational since December 30th;
2. The role of finance. The hedge funds positions were the most bullish ever this year;
3. The weakness of the dollar;
4. The drop in U.S. crude stockpiles to the lowest level since July 2015;
5. On December 26th, the explosion of a pipeline in Libya decreased the production by approximately 100,000 b/d.
In 2017, barrel prices strongly increased in comparison with the previous year. In particular, Brent rose by 17.3%, while WTI by 10.3%. Due to the U.S. fracking growth, the market will probably be in a light oversupply until the first half of 2018 too, but the most important event in the new year will be the launch of the petro-yuan future convertible in gold by China.
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.
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 $58.81/b on November 24th, due to the closure of the Keystone pipeline, which connects Canada’s oil sand fields with the United States of America, following a spill. Keystone’s capacity is 590,000 b/d;
3. The steady depreciation of the dollar, which traded 1.1952 €/$ on November 27th, the lowest since September 4th (1.206 €/$);
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.
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 (in reality, Saudi Arabia needs $73.1/b in 2017).
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.
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).