In November, oil prices were volatile as in October too. In particular, Brent Crude North Sea opened at $47.90/b and closed at $51.36/b, while West Texas Intermediate opened at $46.93/b and closed at $49.36/b. At the time of writing, oil prices were on the rise in the wake of the agreement achieved between the OPEC Members (exempting Libya, Nigeria and the suspended Indonesia). In particular, on November 30th, in Vienna, the Organization of the Petroleum Exporting Countries decided the first cut production deal in 8 years according to which, the new Organization output ceiling will stand at 32.5 million b/d, while non-OPEC producers promised to slash their extraction by 600 thousand b/d.
On November 11th, both oil qualities reached their lowest since August 10 – specifically, the European benchmark trading at $44.52/b, while the American reference, quoting $43.14/b – due to the following reasons:
- The scepticism surrounding the concrete possibility that OPEC would have reached an agreement because some Members – as Iraq, which is the second producer with approximately 4.6 million b/d – stated that it should have been exempted from an oil output curb as previously decided by the Organization only for Iran and Libya hit by sanctions and war consequences;
- According to the Oil Market Report published by the International Energy Agency on November 10th, global oil supply rose, reaching 97.8 million b/d in October. It was 97.2 million b/d in September;
- Based on the data provided by Baker Hughes, the U.S. total oil rigs increased to 593 on November 23rd. They were 557 at the end of October, but 744 one year ago;
- During the second week of November, the long net speculative positions of hedge funds (purchase of paper barrel), both over WTI, and Brent decreased by 149 million $.
Afterwards, the barrel prices increased because investors expected an output cut from OPEC as a consequence of the positive rumors that were coming on the sidelines of the Gas Forum in Doha where, according to Reuters, several OPEC oil ministers – including Saudi Arabia’s Khalid al-Falih – proposed to Iran to cap its oil output at 3.92 million b/d. Three days later, the Russian President, Vladimir Putin, after the Asia-Pacific Economic Cooperation summit in Lima said, "whether an agreement will be reached, I cannot say one hundred percent, but there is a strong likelihood that it will be achieved. The main contradictions within OPEC if not yet eliminated can be eliminated. As for Russia, there is no difficulty for us to freeze production".
The dollars strengthens
In November, the dollar strongly and steady appreciated over the euro. In particular, the €/$ exchange rate opened at 1.1025 €/$ and closed at 1.0635 €/$.
On November 24, the green banknote reached its maximum for nearly 14 years at 1.0548 €/$, gaining approximately 6% since Donald Trump’s election victory on November 8th. Furthermore, the U.S. 10-year Treasury Debt yields hit 2.3809% on November 30th, the highest for the year.
FED Chair, Janet Yellen, told the Joint Economic Committee of Congress that a rate rise is possible "relatively soon", because "at this stage, I do think that the economy is making very good progress toward our goals, and that the judgment the [FED policy] committee reached in November still pertains". After Trump won the Presidency, the reciprocal and usual correlation between the dollar and the barrel did not take place: on the contrary, it has been a positive correlation between the strengthening of the dollar and the rise in oil prices.
In November, the rubble/$ exchange rate opened at 62.92 rubble/$ and closed at 64.33 rubble/$. The Russian currency depreciated over the American currency during the first half of the month, reaching its lowest on November 14th at 66.45 rubble/$, and then appreciated in the second half of November. Therefore, it seems that the rubble was more affected by the oil price trend than the dollar movements. This situation might change if FED decides to tighten its monetary policy before the end of the current year, after the Bureau of Economic Analysis estimated that the annual U.S. real GDP increased at 3.2% in the 3rd quarter of 2016, in addition to the Russian Central Bank rate cut as Governor, Elvira Nabiullina, anticipated for the beginning of 2017.
Latest data and estimates on oil & gas
According to the Oil Market Report, OPEC crude output rose by 230 thousand b/d to a record of 33.83 million b/d in October that is nearly 1.3 million b/d above a year ago. At the same time, non-OPEC production declined by 0.9 million b/d, despite the fact that the Russian Federation will see its output, increasing by 230 thousand b/d in 2016. Moreover, Russian production rose by 0.1% in October to 11.2 million b/d, breaking the post-Soviet record for the second consecutive month.
Oil demand growth is forecast to rise by 1.2 million b/d in 2016 and in 2017 too.
Based on the figures published by the Energy Information Administration on November 14th, the American unconventional output is expected to decline by 20 thousand b/d in December to 4.498 million b/d, its lowest since April 2014. The U.S. crude production, after the peak of 9.7 million b/d in April 2015, decreased to 8.699 million b/d on November 25th. However, according to the data provided by Baker Hughes, the total number of oil rigs (593) has been carrying on to rise again thanks to the light increase in oil prices: "since its trough on May 27, 2016, producers have added 158 oil rigs (+50%) in the US" stated Goldman Sachs. Despite the fact, there are 48 American oil and gas companies that have defaulted on their bond accounts since the beginning of 2016, This situation has led to an additional output of 235 thousand b/d since October 14.
In August, for the third time during the current year, the U.S. crude oil imports overcame 8 million b/d (8.035 million b/d). The U.S. average crude oil import was 7.869 million b/d during the first eight months of 2016. Taking into account that the average was 7.344 million b/d in 2014 and 7.363 million b/d in 2015, our forecast is that the United States will probably need to purchase more crude oil from abroad in the near future continues to gain ground.
Likewise, based on the Us Census Bureau data, we should put into light that the U.S. crude exports rose in September to their highest, at 692 thousand b/d (81 thousand of them exported in Italy).
The decision reached by OPEC Members to cut their production by 1.2 million b/d – in addition with the cut of 600 thousand b/d promised by the non-OPEC producers – opens to a new scenario with regard to the supply-demand outlook, in which oil market’s rebalancing could come before mid-2017 as wished in Algiers at the end of September.
First considerations post OPEC
What are the geopolitical consequences of the agreement concerning OPEC and non-OPEC Members States?
Firstly, it seems that Saudi Arabia and its allies in the Gulf – as Qatar and United Arab Emirates – are the big losers. As we previously wrote in September, Saudis’ strategy implemented from September 2014 to flood the oil market with the aim of dropping prices and expel high cost producers was not completely carried out and especially not in the timing that they were previously thought. On one hand, it is true that Riyadh reached the goal to drive out of the market many unconventional producers but, on the other hand, it was not able to stop the resumption of Teheran’s output after the lifting of the sanctions, paying dearly in terms of State budget deficit too.
Probably, there is another reason that can explain why top oil exporter Saudi Arabia – which has agreed to cut its output to 10.06 million b/d from 10.54 b/d pumped in October – worked so hard to obtain the deal. Riyadh is losing the war, both in Syria, and in Yemen and it must obtain a compromise before Trump – who seems to want a peace process in Damascus in accordance with the Russians – takes office on January 20th 2017.
Secondly, there is no doubt that the clear winner is Iran because the Organization of the Petroleum Countries gave to the Islamic Republic the possibility to set a new production level at 3.797 million b/d. After the country lost 100 million $ revenues since 2011 due to the economic sanctions and the drop in oil exports, the latter "reached 2.44 million b/d in late October, one of the highest levels ever", the Mehr news agency quoted, Iranian Oil Minister, Bijan Namdar Zanganeh.
Having said this, Iran – who seems to be one of the winners of Middle East ground war too – will have to wait and see the first steps of the new American Administration in terms of sanctions, taking into account that its oil & gas system needs millions of foreign investments to modernize.
Thirdly, Iraq decided to support the oil deal for geopolitical reasons too. In particular, thanks to the mediation of Iranians and Russians, Baghdad have been starting to supply El Cairo. Previously, Saudi Arabia stopped to supply Egypt because of the recent political and military support of General al-Sisi to al-Assad.
With regard to non-OPEC Member States, the Russian Energy Minister, Alexander Novak, stated that the Russian Federation "will gradually cut its oil production by 300 thousand b/d in the first half of 2017". From a political point of view, the reaching of an agreement means that Vladimir Putin’s wishes expressed in his interview to Bloomberg, on September 2nd, during the Eastern Economic Forum in Vladivostok, were granted.
Probably, Moscow is the real winner of the game. On one side, the Russian army is close to liberate Aleppo from the terroristic groups thus, increasing its geopolitical influence not only in Syria but in the entire region too. One the other side, after years of economic crisis due to the sanctions imposed by Western countries that "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, the Russian break-even point may take deep breaths.
Last but not least, should the increase in oil prices help a steady restart of the U.S. tight oil production, as it lightly seems to be happening during the last weeks? Are the technological improvements achieved by fracking enterprises enough or the system needs higher prices? Since FED will probably decide to increase the interest rates, it is too early to answer to those questions.
To conclude, taking into account that all the crude producers are directly or indirectly engaged in one or more wars, it seems that the real turning point will be "how far is this agreement going to be implemented", as Keith Boyfield, research fellow at the Center for Policies Studies, pointed out.