In March, oil prices increased. In particular, the Brent quality opened at $36.62/b, closed at $40.09/b, while WTI opened at $33.97/b, and closed at $39.5/b. Since the beginning of the year, both qualities have reached their record high at $41.58/b because of the announcement of the meeting in Doha on April 17 with the aim of coordinating and freezing the oil output of the Russian Federation and the main OPEC Member States. At the beginning of April, after a negative statement by the Saudis with regard to the real possibility of achieving this goal, the price of the barrel decreased at around $37-38/b. In March, the euro significantly strengthened over the dollar, appreciating from 1.08 €/$ to 1.14€/$.
The role of the Central Banks and the weakness of the dollar
On March 10, the European Central Bank announced a set of expansive monetary measures in order to face the risk of deflation and weak economic growth into the Eurozone, cutting the trilateral structure of its interest rates and increasing the so-called corridor. The main refinancing operation – the central rate according to which the ECB lends money through open market operations or auctions – moved from 0.05% to 0%. The deposit facility – which is the rate (lower limit) according to which the Central bank pays on the overnight deposits that banks have in the ECB – decreased from -0.30% to -0.40% (a bank pays a sort of fee in order to lend money). The marginal lending facility – the rate (higher limit) that banks must pay to the ECB in order to borrow overnight liquidity – reduced from 0.30% to 0.25%. Furthermore, the ECB decided to increase the amount of its quantitative easing programme from 60 to 80 billion euros, starting from April 2016 until March 2017 and including the possibility to purchase private corporate bonds in addition to Treasury bonds. In spite of the fact that these monetary options would have supposed a strong depreciation of the euro, then an appreciation of the dollar, and therefore a drop in oil prices, the barrel continued to trade close to $40/b. Probably, the main reason was that Janet Yellen, the Governor of the Federal Reserve, decided on March 16 not to raise its interest rates. Simultaneously, it is not clear, if during the Shanghai meeting last February, the main world Central Banks secretly decided to avoid a strong appreciation of the green banknote and its negative consequences for the global economy or if we are still in the middle of a currency war that FED and China as well, seem to be winning. The only certain thing is that the €/$ exchange rate has been moving away from the parity and this fact could potentially sustain oil prices in the next future. The resurging of crude prices have helped the Russian ruble to become the best performing emerging market currency this year. Since its January 21 historic low against the dollar at 85.6, and 93 to the euro, the ruble has gained over 20% on major currencies, quoting at the end of March 76 €/ruble e 67 ruble/$, despite the fact that the Russian Central Bank did not decide to surge its interest rates, maintaining them at 11%. Moreover, it increased its reserves reaching $386.8 billion and it has been the Central Bank, which purchased more gold in February with 356.000 ounces.
Latest data and estimates on oil & gas
According to the Oil Market Report, in February, global oil supplies eased by 180 thousand b/d to 96.5 million b/d, on lower OPEC (-90 thousand b/d, 32.61 million b/d the total output) and non-OPEC output, while world demand reached 95.2 million b/d during the fourth quarter of 2015. This means that the oversupply of 1.5/2 million b/d in the oil market persists. Compared to a year earlier, production and demand respectively, stand 1.8 and 1.1 million b/d above. With regard to the 2016 estimates, Non-OPEC production is forecasted to fall by 750 thousand b/d, to 57.0 million b/d, 150 thousand b/d more than in last month’s Report and demand is forecasted to gain 1.2 million b/d. For this reason, in the second half of 2016 the gap between supply and demand is estimated to narrow to 0.2 million b/d in both 3rd and 4th quarter 2016. According to the Energy Information Administration, the US tight oil production is expected to decrease by 106 thousand b/d in April, the second highest fall after that in January 2015. The total US oil output currently stands a slightly over 9 million b/d, which is the lowest in 16 month (-3.6% in comparison with February 2016). The American Petroleum Institute confirms this data too. The US oil production is forecasted to drop by 760 thousand b/d in 2016 and 480 thousand b/d in 2017. Only one month ago, the EIA foresaw a fall of respectively, 740 thousand b/d and 230 thousand b/d. According to Baker Hughes, the number of active US oilrigs decreased under 400 (386) for the first time since 2009. Furthermore, taking into account that the gas price has reached its minimum in 17 years, the number of US active gasrigs dropped to 97, the lowest since 1987. Was Charles Kennedy right when he asked himself if we were approaching the end of the shale gas revolution or if we must pay attention to John Hart’ words, the Continental Resources’ chief financial officer, who said that oil recovering to $40/b will reverse the ailing industry’s fortunes allowing it to boost production by 10% next year? According to the Goldman Sachs Group report, in spite of “storage constraints and a still large oversupply in coming months will continue to keep prices in a trendless and volatile range‘, the crude market may be starting to rebalance as US production declines and output disruption from non-OPEC countries could potentially slash global oversupply.
Political and economic assessments
Which geopolitical considerations should we put into light in regards to the upcoming meeting in Doha? Firstly, despite the fact that the oil market trend and the military situation in Syria are two different things with different horizontal events, we cannot completely separate them. On the contrary, they are issues, which move towards the same direction: in fact, there is a sort of “converging parallels‘. In Syria, the Saudis and their military allies, which are the same countries inside the OPEC Organization too, if we except Turkey, are losing the war against the al- Assad’s loyal army, the Russian Federation, Iran and Hezbollah. With regard to the Saudi-led strategy of maintaining low prices thanks to their lower costs of production in order to overthrow high costs producers and defend their market share, Riyadh is achieving only one part of its goals and not as quickly as it previously thought. At the same time the political relations between the United States of America and Saudi Arabia is at the lowest. For these reasons, the Petromonarchy, which is currently in a weak position, sooner or later must come to terms. Iran, which is winning the war in Syria, will probably increase its political and economic influence in the Middle East and says that it will freeze oil production only when it reaches four million b/d. This means that Iran intends to increase, not hold production, which is currently about 3.1 million b/d. “I have already announced my view regarding the oil freeze and I’m saying now that as long as we have not reached four million barrels per day in production, they should leave us alone‘, said Iranian Oil Minister, Bijan Namdar Zanganeh. “When we reach this level of production, we can then cooperate with them‘, he added, implying the agreement by the world’s two biggest crude producers, Russia and Saudi Arabia, to freeze production. At the same time, Iran is unable to boost oil production without foreign investments, which need high and stable prices. “Iran will not be able to seriously increase output without major foreign investment. In addition, Iran’s domestic demand is very high; this is a highly populated country. Well, they can add 300.000-400.000 barrels to the market, which is minor and is more about speculation‘, according to Lukoil Vice-President Leonid Fedun. For these reasons, the meeting in Doha should be the first attempt of reconciliation, both for Riyadh and for Teheran, as pointed out by Davide Tabarelli, President of Nomisma Energia-NE. The Russian Federation, which is the military and diplomatic winner in the Syrian conflict and in the Middle East too, despite the strengthening of the ruble, has to face many challenges as stated in our previous report. It is quite unlikely that Moscow will overcome them without the help of higher raw material prices. From this point of view, the “diplomatic crutch‘ that the Kremlin offered to the White House in Syria, involving Washington in the ceasefire is an intelligent step. However, one issue emerges. The US sanctions against Russia have been more effective thanks to the low global price of oil, said Ambassador Dan Fried, Coordinator for Sanctions Policy at the US Department of State. They were imposed in the summer of 2014: since then, has the US achieved their goal, both in the oil market and in foreign policy?