In December, despite the depreciation of the dollar over the euro that moved from 1.06 €/$ to 1.09 €/$, oil and gas prices significantly dropped in the wake of OPEC’s decision to scrap its official production ceiling during its last meeting on December 4.
In particular, the Brent opened at $45.49/b and closed at $37.99/b, while WTI opened at $42.95/b and traded at $37.21/b at the end of 2015. Both qualities reached their minimum on December 21 respectively, $36.63/b (the lowest since July 2004) and $35.75/b. Then, prices remained steady until the beginning of 2016 when they restarted their downward trend towards $30/b. This price is under the break-even point of the “looking forward” project mentioned by the CEO of ENI Claudio Descalzi. At the same time gas prices in the US Nymex market dropped below $1.89/Mbtu, their minimum in 16 years. How can we explain the depreciation of the dollar against the euro?
On December 3, the European Central Bank cut the deposits rate to -0.30% and extended its Quantitative-easing program until March 2017. On December 16th, the Federal Reserve increased the Fed Funds from 0.25% to 0.50%. Even so, the dollar depreciated againt the euro, but the price of the barrel did not increase as usual. Probably, the market expressed its disappointment over the monetary policy implemented by Governor Mario Draghi, who did not increase the total monthly amount of bonds purchased by the ECB. Moreover, it seems that the market has already discounted the “new interests course” opened by Janet Yellen, FED Governor.
Crude oil: the consequences of the fall in prices
Which are the most important effects of the fall in oil prices?
Firstly, according to MEES-Weekly Middle East Oil & Gas News and Analysis, between 2013/15, the annual revenues of the OPEC countries decreased by $598 billion, more than 50%, and the expectations for 2016 estimates a further decrease of $118 billion. Certainly, this impact on the OPEC member States budget, which includes Indonesia after its return, which was decided during the meeting mentioned above, is different from country to country. In particular, the economies of Iran, Venezuela, Algeria, Nigeria and Ecuador are suffering more losses than Saudi Arabia, Kuwait, United Arab Emirates and Qatar because of a higher break-even point. “Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff”, said Helima Croft (RBC Capital Markets).
Secondly, as pointed out by Fatih Birol, there was a 20% decrease in oil industry investments in 2015. In addition, the Director of the International Energy Agency stated, “during the last 30 years we have never seen a decline of this amount in investments, adding that this situation will have effects [in prices] in the years to come”.
Thirdly, the weakening of the Russian currency is a factor. In fact, on December 31, the ruble reached its lowest levels, both against the euro (80.6 €/ruble), and the dollar (74.1 ruble/$) respectively, similar to August 26 and the speculative attack sustained on December 17 2014, which was also overcome thanks to a currency swap between the Russian Central Bank and the People’s Bank of China.
According to the data provided by the Oil Market Report on 11th December 2015:
- Global oil supply reached 96.9 million b/d in November. OPEC crude oil production increased by 50 thousand b/d to 31.73 million b/d total output (1.8 million b/d above a year ago) due to record production from Iraq. Non-OPEC supply remained at 58.5 million b/d, but annual growth slowed to below 300 thousand b/d from 2.2 million b/d at the start of 2015 despite the fact that the Russian Federation achieved its record high with 10.78 million b/d. In 2016 Non-OPEC supply is expected to decline by 0.6 million b/d.
In light of the fact that Saudi Arabia has held supply above 10 million b/d since March 2015, we can see that the risky Saudi-led strategy is starting to work as time goes by. Taking into account that the oversupply is still evaluated between 500 thousand and 2 million b/d and that it coincides with the surpassing of the OPEC output ceiling, the request, made by the Iranian Energy Minister Bijan Zanganeh before the OPEC meeting, to respect the Cartel production limit clearly remained a dead letter. Probably, this situation led the Russian Energy Minister, Alexander Novak, to state, “Saudi Arabia has ramped up production by 1.5 million barrels per day, which in fact destabilized the situation on the market”.
- With regard to the demand, the resulting annual growth of 1.8 million b/d for 2015 was driven by China, the US, India and - somewhat surprisingly - Europe. In 2016, world demand growth is forecast at 1.2 million b/d.
After the record high reached in April 2015 with 9.7 million b/d, US crude oil production is currently at around 9.2 million b/d, which is the result of 2 different tendencies. On one hand, the conventional output has increased due to the new operational wells in the Mexican Gulf. On the other hand, the American unconventional output has been decreasing and the strengthening of the FED monetary policy will definitely put the frackers in a corner because of the increase in their debt. The simultaneous “green light” given by the US Congress to oil exports will not save them. During 2015, approximately 40 enterprises filed for to Chapter 11 (Magnum Hunter Resources being the latest one). “Time Is Running Out on U.S. Frackers”, the story published on Bloombergview.com, pointed out that in the second quarter of 2015, 83% of US on-shore oil producers’ operating cash flow was used for debt servicing. Even so, British MP’s have voted to allow fracking for shale gas 1.200 meters below national parks and other protected sites.
What is happening in Europe?
European natural gas production has been decreasing for years. This trend will accelerate since the Dutch government has decided to reduce the production from Groningen, the largest gas field in Europe and the third largest in the world, due to an increase in seismic activity. Thus, after 55 years, Holland has become again a gas importer from the Russian Federation and Norway. Taking into account the Russian objective of bypassing the territory of the Ukraine, the cancelation of the South Stream and the freezing of the Turkish Stream project, Germany may be the new biggest gas hub in Europe. In that case, Italy would depend on Germany for its gas supply too. I would like to think that the Italian Prime Minister, Matteo Renzi, faced this strategic issue with the Russian President, Vladimir Putin, during their last phone call. The involvementof the Italian company SAIPEM for the laying of pipes on the Baltic floor is important, however it is not enough for the energy security of Italy, which receives all its Russian gas, covering 42% of its gas energy mix, through the Ukraine. After SNAM took over 20% of the shares in the TAP pipeline from Statoil, why doesn’t the Italian government suggest doing the same for the North Stream II? On the other hand, TAP will satisfy approximately 1% of the European consumption and SNAM’s most important shareholder is Cassa Depositi e Prestiti Reti (28.98%), which is controlled by the Italian Ministry of Economy and Finance (80.1%).