In June, oil prices were characterized by high volatility. In particular, Brent Crude North Sea opened at $49.68/b and closed at $49.71/b, while West Texas Intermediate opened at $48.87/b and closed at $48.36/b. In late June and early July, the oil was trading at around $45-46/b because of fears that Great Britain’s "Brexit" from the European Union could affect the fragile global economy, slowing down world oil demand. Despite the failure of the OPEC meeting in Vienna on June 2, in which the member States did not reach an agreement, on neither a production freeze, nor the re-establishing of an output ceiling, both qualities reached their monthly high on June 8 respectively, quoting $52.72/b – record high since October 2015 – and $52.08/b – highest level since July 2015. Probably, this upward trend at the beginning of June was due to the statements made by the Governor of the Federal Reserve, Janet Yellen, who stated she “expects to raise interest rates only gradually and holding off from specifying any timeframe, a shift from her May 27 stance that a move was probable in the coming months”. In fact, at the same time, the dollar depreciated over the euro, moving from 1.117 €/$ on June 1 to 1.138 €/$ on June 8. Then, prices decreased, reaching their lowest on June 16, when the European benchmark traded at $47.04/b, while the American quality quoted at $46.57/b. We cannot exclude that this fall was the consequence of the temporary light recovery of the US tight oil production during the first week of June. In particular, from June 3 to June 10, the American output grew by 10,000 b/d to 8.745 million b/d because of the increasin the number of the active oilrigs. In the aftermath, US crude output decreased by 123,000 b/d, to 8.622 million b/d, the lowest level since September 2014. During the first week of July, US crude production reached 8.428 million b/d.
The Brexit cyclone and the fluctuation of the rouble
On June 23, in coincidence with the referendum dealing with the issue of Great Britain remaining part of Eu, Brent traded at $51.09/b, while WTI stood at $50.27/b. Due to the Brexit victory, the euro immediately depreciated over the dollar quoting below 1.10 €/$ and the pound reached its lowest over the dollar since September 1985 at 1.322 £/$ (it was 1.444 £/$ on June 1st). At the same time, both oil quality prices dropped by $3.5/b. Then, rebounded again probably due to the fall of American crude stockpiles to 526.6 million bbl, the lowest since March 2016). This latter data shows that the rebalance in the oil market is still in place. In June, the rubble/$ exchange rate opened at 66.9 rubbles/$ and closed at 64.4 rubbles/$. The Russian currency reached its record high over the American currency on June 8 when the Russian Central Bank decided to cut its key interest rate by 0.5% to 10.5%. The last time the regulator cut rates was in July 2015. "The Board of Directors notes the positive trends of more stable inflation, decreased inflation expectations and inflation risks against the backdrop of imminent growth recovery in the economy". This decision does not mean that the Russian authorities have the goal of strengthening the rubble, which not only depends on oil prices trend.
Latest data and estimates on oil & gas
According to the data provided by the Oil Market Report on June 14, global oil supply was 95.4 million b/d in May, 590,000 b/d less in comparison with the same period of 2015. This is the first significant output fall since the beginning of 2013. If we look deeper into global supply, this drop especially involved US crude production that, after the peak of 9.7 million b/d in April 2015, decreased by more than 1.2 million b/d. With regard to OPEC Member countries, supply lightly decreased by 110,000 b/d to 32.61 million b/d in May. The significant Nigerian losses due to sabotage and political instability that the country is facing were counterbalanced by the steady and unexpected rise in Iranian production, close to 3.8 million b/d (700,000 b/d more since the beginning of the current year).
As regards non-OPEC member countries, China diminished its crude conventional production in May by 7.3% to 3.99 million b/d, the highest drop in 15 years.
During last year, while OPEC output increased by 500,000 b/d, non-OPEC production decreased by 1.3 million b/d, despite the fact that the Russian Federation raised its oil extractions. In addition, the same report estimates that in 2016 global supply will decrease by 0.9 million b/d, of which 500,000b/d due to US tight oil production. American production is forecasted to average 8.6 million b/d in 2016 and 8.2 million b/d in 2017, both unchanged from last month’s previsions. In 2016, the International Energy Agency (IEA) predicts that global demand will increase by 1.3 million b/d. In 2017, thanks to an equal growth rate, it will reach 97.4 million b/d. In May, China increased its imports by 38.7% in comparison to the same period of 2015 to 7.59 million b/d. From the begging of 2016, the Chinese increment is at around 16%, the highest monthly rise in the last 6 years. These data confirm the light, but steady decline in the supply surplus, which was at 1.5 million b/d in January 2016 and it is currently estimated at around 800,000 b/d, as the combined effect of an output slowdown - then, transformed into a decline - and a more vigorous increase in demand for the black gold.
The British policy on North Sea oil production
If we want to understand the reasons that brought the United Kingdom to leave the EU, we should analyze 2 issues. Firstly, the current mercantilist policy that Germany has been carrying out inside the European market. Secondly, the turning point implemented by Margaret Thatcher to the British economy at the end of the 70s. Great Britain’s main economic problem is the growth of the trade deficit that is the excess of goods and services imported in comparison with those exported. This situation worsened after the 2008 crisis. In particular, the British Current Account deficit reached 5% of the GDP in 2015. On the other hand, Germany’s surplus hit 8% of its GDP. Since 2007, Germany has overcome a 6% trade surplus. This is in contradiction with the European rules, according to which, a country cannot surpass a 6% surplus or a 4% deficit as an average of 3 years. In 1978, at the beginning of the Thatcher era, North Sea crude oil production was at around 1.5 million b/d, while in 1990 it overcame 3.5 million b/d. The black gold revenues (rent), which were 0 at the beginning of the 70s, grew up to 3% of the GDP in 1984/5 (approximately, £45 billion at present value), thus giving the possibility to the British government to replace those deriving from the exports in the industrial sector (profit). This factor was the economic precondition that allowed the destruction of national manufacturing. At the same time, the British have increased the role of finance, the market deregulation and the inflow of capital into the City (surplus of the Capital Account).
Are we so sure that the Iron Lady was "The woman who saved Britain"? Should the former Great Britain Prime Minister bring any responsibility dealing with the creation of those preconditions that, later on, contributed to the creation of the present current account deficit?
The Norwegians for example, did not use their oil and gas rent to decreased the taxation to the richest class, but they invested their revenues in a fund devoted to the future generations. In 2013, this hypothetical British fund was estimated at around £450 billion worth. Unfortunately, Great Britain reached its peak in oil production in the biennium 1998-2000. After hitting its highest rate of 6% energy revenue in terms of GDP, today the British oil & gas rent worth is now less than 0.5% of its economy.
The impression is that the result of the referendum has something to do with energy as well, but the British possibility of investing the energy earnings, both in a sovereign fund, or in the manufacturing sector have run out.