In August, oil prices significantly increased. In particular, Brent Crude North Sea opened at $42.23/b and closed at $46.97/b (13% gain), while West Texas Intermediate opened at $40.05/b and closed at $45.42/b (14% gain).
In the first part of the month, and especially during the second ten days, both quality prices strongly raised. The European benchmark reached its record high on August 18th at $50.82/b, a level last seen on July 4th. At the same time, the American reference hit its highest on August 19th, at around $49.04/b. Then, the barrel quotation decreased until the end of the month.
In August, oil prices increased because:
1. Of the rumors, started at the beginning of the month, regarding a possible agreement between OPEC and Russia during the energy meeting in Algiers that will take place next September 26th/28th;
2. Of the Nigeria’s serious productive problems. Moreover, Nigerian Oil Minister, Emmanuel Kachikwu, said, "Our average for the year will obviously be dismal. I would imagine that we would probably end the year at about 1.5 million barrels a day at best", as militants have seized important oil facilities. Previously, Nigeria pumped 2.5 million b/d;
3. Of the dollar trend. Real, despite the fact that the €/$ exchange rate opened the month at 1.1164 €/$ and closed at 1.1132 €/$ on August 31st, if we go deeper in to the monthly trend we can put into light that from August 9th/23rd the green banknote depreciated from 1.1078 €/$ to 1.1339 €/$. Then, the American currency steadily appreciated over the European currency until the end of the month. Therefore, the usual and reciprocal ratio between the dollar and the barrel cost took place in August.
The tendentially upward oil price trend has been carrying on after Russia and Saudi Arabia created a task force during the G20 summit in China on September 4th/5th. As expressed by Russian Energy Minister, Aleksandr Novak, to the Saudi newspaper Asharq al-Awsat, "with regard to cooperation with Saudi Arabia, the dialogue between our two countries is developing in a tangible way, whether in the framework of a multi-party structure or on a bilateral level".
The aims of these consultations are:
1. Review oil market fundamentals;
2. Actions for oil market stability;
3. Possible production freeze.
As pointed out by Davide Tabarelli, President of Nomisma Energia-NE, on September 6th, "the oil market pays attention to every initiative of both countries".
Real, the Russian Federation and Saudi Arabia are the first two oil exporters in the world with approximately 8 million b/d each one. Taking into account that the current world oil demand is 96 million b/d of which, the oil producers consume 36 million b/d, the world oil exporting market is at around 60 million b/d. This means that Moscow and Riyadh covers more than ¼ of the world oil exporting market.
At the time of writing (September 14th), oil prices have been slightly increasing since the beginning of September due to the following factors:
1. As we previously said, the positive expectations from the Algiers’ meeting, which may also include the possibility of restoring individuals quotas as requested from Iran maybe, in exchange to the support of Tehran to an output freeze;
2. According to the data from the American Petroleum Institute, U.S. crude stocks fell by a surprising 12.1 million barrels last week. If this data will be confirmed, the decrease will be the largest since April 1985 and will "help pave the way to a sustained tightening of the crude oil balance", as IEA said;
3. In accordance to the General Administration of Customs, in August, China’s monthly oil imports reached their highest level since April at about 7.77 million b/d;
4. The light weakening of the dollar over the euro. On September 8th, the green banknote reached 1.1296 €/$.
Latest data and estimates on oil & gas
According to the data provided by the International Energy Agency Oil Market Report on August 11th, world oil supply increased by 0.8 million b/d in July, as both OPEC and non-OPEC production rose.
In comparison with a year earlier, the current global output is 215 thousand b/d lower, as declines from non-OPEC countries, which production is forecast to drop by 840 thousand b/d this year too before rebounding by 380 thousand b/d in 2017, were offset by OPEC members. In particular, the Cartel members, which crude supply rose by 150 thousand b/d to 33.39 million b/d in July, produced 680 thousand b/d more year-to-year. That is an eight-year high.
The latest data of the Oil Market Report published on September 13th shows that world oil supplies fell in August by 0.3 million b/d below a year ago, dragged by non-OPEC countries.
Global oil demand was estimated to increase by 1.4 million b/d in 2016 in the August’s Oil Market Report and is forecasted to raise by 1.3 million b/d in 2016, at a slowest pace than previously predicted. For 2016, a gain of 1.3 million b/d is expected, but to slowdown to 1.2 million b/d next year due to a weaker world economy.
The oversupply of crude in the market, which is currently slow downing, now is expected to end at least through the first half of 2017 and not at the end of the third quarter of the current year as previously anticipated.
Based on the figures published by the Energy Information Administration on August 15th, the U.S. tight oil production decreased by 89 thousand b/d in September and, according to the latest data from the Drilling Productivity Report published on September 12th, the American unconventional output is expected to decline by 61 thousand b/d in October too. If we look deeper into global supply, non-OPEC drop has been continuing to involve the U.S. crude production that, after the peak of 9.7 million b/d in April 2015, decreased to 8.458 million b/d on September 2nd.
In June 2016, the U.S. crude oil imports reached 7.611 million b/d decreasing from 7.946 million b/d in May. They were 7.637 million b/d in April, 8.042 million b/d in March, 7.910 million b/d in February and 7.675 million b/d in January. Last time that the U.S. crude oil imports surpassed 8.0 million b/d was in August 2013. The U.S. average crude oil import was 7.804 million b/d during the first half of 2016. Taking into account that the average was 7.351 million b/d in 2015, 7.344 million b/d in 2014 probably, the United States will need to purchase more crude oil from abroad.
According to The Fuse, "so far in 2016, the U.S. has imported some 3.1 million b/d from OPEC members. That is up from 2.6 million b/d during the same period last year, a jump of almost 20%. […..]. While the Saudis saw modest gains in the past year in the volumes (above 1 million b/d), the biggest winners have been Nigeria, Angola, Ecuador, and Iraq".
Putin: "From the viewpoint of economic sense and logic, then it would be correct to find some sort of compromise. I would very much like to hope that every participant of this market that's interested in maintaining stable and fair global energy prices will in the end make the necessary decision".
The situation of energy geopolitics
On September 2nd, during the Eastern Economic Forum in Vladivostok, the Russian President, Vladimir Putin, gave an interview to Bloomberg, in which he pointed out these issues:
1. The Russian aim – "From the viewpoint of economic sense and logic, then it would be correct to find some sort of compromise. I am confident that everyone understands that. We believe that this is the right decision for world energy". […..]."I would very much like to hope that every participant of this market that’s interested in maintaining stable and fair global energy prices will in the end make the necessary decision".
2. The Russian positions towards Saudi Arabia – "Our Saudi partners at the last moment changed their view [with regard to the meeting in Doha last April]. We did not reject the idea of freezing output. Our position has not changed. Prince bin Salman "is a very reliable partner with whom you can reach agreements, and can be certain that those agreements will be honored";
With regard these first two points, it is not clear if, V. Putin’s statements may also have to do with the current peace process in Syria where the Saudis who, despite the Russian-American thin truce reached, are still supporting some terrorists military groups;
3. The Russian position towards Iran – Teheran "is starting from a very low position, connected with the well-known sanctions in relation to this country. It would be unfair to leave it on this sanctioned level", he said.
At present, OPEC and Russia are pumping at, or close to, record rates. Riyadh pumped 10.67 million b/d in July, its biggest monthly output. Saudi Arabia’s previous production high was 10.56 million b/d in June 2015. "It’s not surprising to see Saudi output at a record. The Saudis did not want to cut back on exports and they needed to produce more to meet local summer demand. Also, the Saudis are processing more crude this year at refineries as they want to grow in the products market", analyst Anas al-Hajji told Bloomberg. Despite this level of output, Riyadh’s foreign reserves dropped to $555 billion, down $6 billion in July. Saudi Arabia’s foreign holdings are 16% down in comparison with July 2015 and are at their lowest level since February 2012. They were at their highest in August 2014 at $737 million.
Russia’s international reserves grew to $398.2 billion in the week through August 19th, the Russian Central Bank reported. This is its highest level since December 20th, 2014. In August, the ruble/dollar exchange rate opened at 66.17 ruble/dollar and closed at 65.27 ruble/dollar. The Russian currency reached its highest versus the American currency on August 16th, at 63.74 ruble/dollar (at the time of writing, is 64.74 rubble/dollar). In July 2015, the Russian’s reserves were 358 billion dollars, while their record high was in 2008, at around 600 billion dollars.
Tehran has regained its pre-sanctions share of the global oil market exporting 2.5 million b/d, according to Iranian Vice President, Eshaq Jahangiri, who said, "Iran has managed to increase oil production that had been suspended as a result of the sanctions and take back the country’s former share of the market".
To conclude, despite the fact that the rebalancing in the oil market is still in place and, with regard to the stability in prices, the persistence of a very high oil stocks is a counter tendency to take into account, "the high cost producers are closing down and going out of business" investor Jim Rogers said. This will probably carry on apart from the decisions that the meeting in Algiers might achieve. Real, if someone wants that the unconventional tight oil production will not have the opportunity to significantly return into the market, prices must not overcome 60 $/b at least during the last months of 2016. Even if someone will have to wait a while longer.