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!
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.