In February, oil prices were steady at around $55/b because, both OPEC, and non-OPEC countries have been carrying on their reduction programme in full compliance, despite the fact that Libya and Nigeria, which are exempt from cuts, have increased their extractions. Precisely, according to the International Energy Agency, the oil producers linked to the 2016 November agreement cut 1.04 million barrels out of 1.16 million barrels promised.
From a geopolitical point of view, it is interesting to put into light that the OPEC countries, which indirectly fought the war in Syria and lost it, such as Saudi Arabia and Qatar, have slashed their output more than they had to do. Among the non-OPEC producers that won that war, the Russian Federation has been respecting its cut plan in full compliance too.
In February, Brent Crude North Sea opened at $56.57/b and closed at $56.53/b, while West Texas Intermediate opened at $53.62/b and closed at $54.41/b. Both qualities reached their minimum on Feruary 7th respectivelly, pricing $54.69/b and $52.39/b. Similar to the previous month, these oil prices lowest are related to the hedge funds that, after having amassed net-long speculative positions equivalent to 885 million barrels on January 31st, increasing the long-short ratio at 9:1, started to cash their revenues.
Moreover, during the third week of February, the net long speculative positions rised to 951 million barrels with the long-short ratio reaching 10.3:1, but prices did not decreased as at the beginning of the month when the same bets decreased by 6.4% during the last week of February. Taking into account that we cannot exclude the possibility that finance might spark a temporary and light downturn in prices, how can this trend be explained?
On one side, this means that – for now – there is enough liquidity for investors to speculate in paper barrels. However, on the other side, the excess in oil supply has been slowly ending, even though the oil stock amount is still high.
According to the Oil Market Report, inventories at the end of December were below 3 billion barrels for the first time since December 2015 but, based on EIA data, the amount of U.S. oil stocks reached the maximun of 518 million barrel the week ending on February 10th.
Actually, the inventories level is not the real problem as pointed out by Richard Gorry of JBC Energy Asia who said that those hoping for higher oil prices on the deal were misguided from the start. "I don’t think that [OPEC’s] goal was to push the oil price up to $70 or something in that range. They were really trying to protect the oil price on the downside…I think they knew that the market wouldn’t be rebalanced, but they were making sure that the producers were protected on the downside", Gory said on CNBC. "Don’t expect $70 oil because that was not the objective".
At the time of writing (on March 7th), the European and Asian benchmark was quoting at $56.57/b, while the American reference was trading at $53.73/b.
With regard to currencies, the Russian ruble continues its upward surge, trading at 57.1 rubles/$ on February 16th for the first time since July 2015 despite the fact that the Central Bank of Russia has been purchasing dollars to replenish reserves. However, the Institute announced in February its "capability to cut its key rate [10 percent per annum] in the first half of 2017 has diminished." In December 2016, we wrote that according to goldcore.com, "Russia gold buying accelerated in October with the Russian Central Bank buying a very large 48 metric tonnes. This is the largest addition of gold to the Russian monetary reserves since 1998." In January 2017, Russia carried on this policy. Based on finance commentator Jim Rickards, "the smartest central banker in the world just bought another 28 metric tonnes of gold." If a new debt crisis sparks, involving the dollar too, gold might be the insurance of the international monetary system.
Latest data and estimates on oil & gas
According to the data published by the Oil Market Report on February 10th, global oil supply decreased by 1.5 million b/d in January 2017, reaching 96.4 million b/d – 730 thousand b/d less than a year ago – because of the OPEC & non-OPEC agreement. In particular, OPEC output dropped by 1.04 million b/d to 32.06 million b/d in compliance of approximately 90% with the November agreement.
In 2016, OPEC crude extractions rose by 0.97 million b/d from 31.65 million b/d in 2015 to 32.62 million b/d, while non-OPEC oil output fell by 0.86 million b/d, from 58.45 million b/d to 57.59 million b/d.
Moreover, the Report put into light that the international oil demand is forecast to grow by 1.6 million b/d in 2016 and 1.4 million b/d in 2017. Based on the figures published by the Energy Information Administration on February 13th, the American unconventional output is expected to increase by 80 thousand b/d in March 2017 to 4.873 million b/d. The U.S. crude production, after the peak of 9.7 million b/d in April 2015, decreased to its lowest of 8.428 million b/d on July 1st 2016. It then started increasing to 9.032 million b/d, which was reached on February 24th 2017. In fact, according to the data provided by Baker Hughes, the total current number of U.S. rigs – 754 of which, 602 (79.8%) of oil rigs and 151 (20%) of gas rigs, plus 1 miscellaneous on February 24th – have been carrying on to rise again thanks to the increase in oil prices. IEA expects that the US tight oil will increase by 175 thousand b/d in the current year, bringing its December 2017 production 520 b/d thousand higher y-o-y. As pointed out in our previous monthly report, the U.S. frackers may face two kinds of problems with regard to the tight oil output. The first has to do with the increasing in cost extractions estimated by the Wall Street Journal at around 10/20% since the beginning of the present winter. The second is related to the yield trend gap between energy bonds and U.S 10-year Treasury Bonds that has been narrowing. While it is too early to understand the sustainability of the costs because they are directly linked to the relation between the future barrel price trend with the productivity of each well, a further reduction of the yield trend gap is possible because a rate hike "is on the table for serious consideration" at the FED’s March meeting. In December 2016, the U.S. crude oil imports stood at 7.860 million b/d. The American average crude oil imports was 7.877 million b/d during 2016, on the rise if compared with the 7.344 million b/d imported in 2014 and 7.363 million b/d in 2015. This data has to be compared with the U.S. oil exports trend, which reached the record high of 1.2 million b/d during the last week of February.
Geopolitics of Natural Gas
On December 5th, during a working meeting in the presence of Alexey Miller, Chairman of the Gazprom Management Committee, and Claudio Descalzi, Chief Executive Officer of ENI, held in St. Petersburg, the parties examined the possible infrastructure solutions for supplying Russian gas to Europe, particularly to Italy, via a southern route.
According to SNAM, in 2016 the Italian natural gas consumptions reached 68.8 Gmc3 (calorific power equal to 39 MJ/mc), increasing by 3.4 Gmc3 in comparison with 2015 (+5.2%). As pointed out by sicurezzaenergetica.it, this data strengthened the positive recovery reported the previous year, but it is still far from the 2008 levels, before crisis (-13.8 Gmc3, -16.7%). In particular, the thermoelectric sector consumed 22.7 Gmc3, registering the highest increase y-o-y (+2.5 Gmc3, +12.1%), while the residential consumption trend was stable, using 30.8 Gmc3 (+0.1 Gmc3, +0.4%). Lastly, the industrial sector consumed 13.1 Gmc3, on the rise in comparison with 2015 (+0.6 Gmc3, +4.9%), but lower than the 2008 consumption levels of 14.2 Gmc3 (-1.2 Gmc3, -8.1%), pointing out that the country has not overcome its economic crisis yet. On February 16th, during the 5th Russian-Italian Seminar that took place in Milan, Sergey Komlev, Head of Contract Structuring and Price Formation Directorate Gazprom Export, analysed the Russia-Italy relationship in natural gas, pointing out the following issues:
-The Russian Federation is the major supplier of natural gas to Italy with a share estimated in 2016 at approximately 38% in terms of imports, which more than doubled since 2010.
-Other major suppliers of Italy are respectively, Algeria, Norway, Netherlands and LNG producers.
-Italy is the third largest buyer of Russian gas and the second in the European Union.
-From 2010, Gazprom’s export to Italy has been growing by 14.1% CAGR (annual average rate of growth) in volume terms.
-A comparison between suppliers with different gas prices, shows that Russian price is in the low-range of the Italian import prices.
On February 7th, the Russian President, Vladimir Putin, ratified the agreement with Ankara for the realization of the Turkish Stream project.
On February the 20, South Stream Transport B.V. and Allseas Group signed, in Amsterdam, a contract to build the second string of the gas pipeline’s offshore section, which will deliver gas to southern and southeastern Europe. Through which infrastructures? Poseidon pipeline is one of the options (connecting Turkish Stream) to European consumers after the Memorandum of Understanding reached by Gazprom, DEPA and Edison on February 16th 2016.
However, it seems that there is a second option for the Russian gas. In fact, Gazprom has declared for the first time that it may be interested in using the Trans-Adriatic Pipeline as a way of delivering Russian gas to Italy:
"In order to bring this gas to Europe we need additional infrastructure, which we are working on with our European partners – Nord Stream 2 and Turkish Stream. This capacity will not be sufficient to bring all this to Europe. So this is why we are talking to use available capacity on the Poseidon project that will be ready soon, or maybe TAP," said Alexander Medvedev, addressing the European Gas Conference in Vienna on January 24th.
With the injection of the Russian gas into TAP, Southern Europe will overcome the crucial issue related with the Azeri gas that is "the real sufficient output capacity [Saha Deniz II gas field] linked to the infrastructure [TAP]" as has pointed out by the Italian Political Observatory since 2013. According to Enerdata scenarios, natural gas consumption may even increase under favourable conditions including low prices and technological improvements. Thus, natural gas may retain its role as economically sound and reliable energy source and Russia will provide no less than one third of the Italian natural gas imports by 2030. To conclude, the data emphasize the tight and increasing relationship between the Russian Federation and Italy in the gas sector, also giving to the latter the possibility to play a stronger key role inside the Mediterranean.