Interrogation marks
Fears linked to Brexit and the general slowdown in global economic growth levels negatively affected the trend in oil prices between July and August, while the geopolitical front reveals a new rapprochement between Ankara and Moscow, and a revival of the Turkish Steam project

In July, oil prices significantly dropped at around $6.5/b. In particular, North Sea Brent Crude quality opened at $49.71/b and closed at $43.32/b, while West Texas Intermediate opened at $48.31/b and closed at $42.14/b. Both qualities reached their highest on July 4th respectively, quoting $50.04/b and $48.68/b. Then, prices steadily decreased. This downward trend carried on during the firs week of August too, when price for U.S. crude fell below the psychologically level of $40/b. Precisely, WTI dipped to $39.86/b on August 2nd – its lowest since April 20th. At the time of writing (on August 5th), European benchmark has been trading at $44.42/b, while the American benchmark at around $41.96/b.

What are the causes of this ongoing decline?

The causes for the negative #oilprice trend include #Brexit, but also #US inventories trend and speculation on #energy

Firstly, the fears related to Brexit. Real, the exit of Great Britain from the European Union could slowdown the fragile recovery of global economy. Since June 24th – the referendum day, which ruled the victory of the “Leave” over the “Remain” – the British currency has depreciated over the green banknote by 13%. In particular, the $/pound echange rate, moved from 1.48 dollars per pound to 1.29 (on July 7 and 11), the lowest since 1985. On August 4th, the Bank of England (BoE) reduced the official base rate from 0.5% to 0.25% which is a record low, and the first cut since 2009 when the global financial crisis has started, carrying on its quantitative easing program.
Secondly, the U.S. inventories trend. According to the US Energy Information Administration, the crude stockpiles decreased by 2.546 million barrels during the first week of July and 2.342 million barrels during the second week (analysts expected a fall by 1.7 million barrels) to 519.5 million barrels, still up from the 463.9 million barrels reached a year ago. This situation, in part, was counterbalanced by a surprise rise in gasoline inventories during the peak demand season for American motor fuel. In fact, gasoline inventories respectively, increased by 1.213 million barrels (the market expected a fall by 100 thousand barrels) and 911 thousand barrels to 241 million barrels that has been a record since more than two decades in this period of the year. The combined inventories of oil and total refined products reached the record of 2.08 billion barrels. “The market is technically weak, inventories are still high for summer, maintenance season is not far off and we have floating barrels at sea to top it all”, said Pete Donovan, while ABN AMRO senior energy economist, Hans van Cleef, warned that Brent could fall to $42-43/b and “near-term, there are still some downside risks”. On the contrary, at the end of July, while gasoline stocks slumped by 3.3 million barrels, for the first time since mid-May, crude stocks increased by 1.7 million barrels at the Cushing.
Thirdly, the role of finance and speculation. During the first six month of the current year, hedge funds financial investments supported the bullish trend of the barrel (purchase). In April, when oil prices significantly increased at around 20%, the total amount of the long net speculative positions, both over the Brent and WTI were at their record high. The sum of futures and options were equal to 656 million barrels approximately, 7 times more the daily oil global output. Now, the same hedge funds are betting on the fall. In mid July, the total amount of the long net speculative position of the financial operators (hedge funds and money managers) over Brent and WTI were 453 million barrels approximately, 213 million less than the peak reached in April. At Nymex, the short net WTI speculative positions (selling) increased from 53 million barrels to 141 million barrels from May to the end of June.
During the second half of July the euro/dollar exchange rate moved from 1.11 €/$ to 1.09 €/$, partially supporting the fall of the barrel.  It seems that the market focused on near oversupply and the end of disruptions in Canada and Nigeria than on expectations of increasing global oil demand and the declinig of U.S. unconventional output. This situation will probably delay the long anticipated rebalance in the market.

"The market is technically weak, inventories are still high for summer, maintenance season is not far off and we have floating barrels at sea"

Latest oil and gas data and estimates

After the significant output fall in May, the first since the beginning of 2013, according to the data provided by the Oil Market Report on July 13th, global oil supplies rose by 0.6 million b/d in June to 96 million b/d. In comparison with the same period of 2015, world supply decreased by 750 thousand b/d as higher OPEC output only partially offset non-OPEC declines. In particular, OPEC crude output (including Gabon) increased by 400 thousand b/d – 510 thousand b/d above a year ago – to an eight-year high of 33.21 million b/d, while Saudi Arabia reached 10.45 million b/d.  Based on the figures published by the Energy Information Administration on July 18th, the U.S. tight oil production is expected to decrease by 99 thousand b/d in August.  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 8.460 million b/d in the fourth week of July.
In May 2016, the U.S. crude oil imports reached 7.946 million b/d slightly increasing from 7.637 million b/d in April. They were 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. Taking into account that the U.S. average crude oil imports was 7.351 million b/d in 2015 (7.344 million b/d in 2014), it seems that the United States’ oil import trend is upward and the country will probably need to purchase more crude oil from abroad. At the same time, according to the Us Census Bureau, the U.S. exported 662 thousand b/d in May, which is a record high since 1920.
The Oil Market Report also forecast that the non-OPEC production will drop by 0.9 million b/d in 2016, to a total amount of 56.5 million b/d.
In the second quarter of 2016, oil demand is increased by 1.4 million b/d y-on-y and is predicted to raise by 1.3 million b/d in 2017.
To conclude, despite the fact that the rebalancing in the oil market is still in place, the persistence of very high oil stocks is a counter tendency to take into account with regard to the stability in the barrel price.

The situation of energy geopolitics

According to the BP Statistical Review 2016, the Russian Federation is the first European supplier (European Union 28 + Turkey + Switzerland), both of oil, and natural gas, respectively providing 37% and 35% of the European consumptions.
According to Gazprom CEO, Alexey Miller, the estimates related to the first half of 2016 showed an increase of the Russian natural gas exports towards Europe at around 15% in comparison with the same period of 2015 (+10.2 Gmc3).  In addition, based on the consensus forecast, due to the decrease in the domestic production and the contemporary raise in consumptions, Europe will need to import additional 113 Gmc3 of gas in 2025 and 150 Gmc3 in 2035.
Below, the 2015 natural gas mix of the European Union:

-Domestic production 30% (on the fall);
-Russian Federation 29% (the percentage is more than 31% if we consider Europe);
-Norway 25%;
-Qatar and others NGL 10%;
-Algeria e Libya 6%.

The 2015 natural gas mix of Italy:
-Oil 39%;
-Natural Gas 36%;
-Renwables 10%;
-Coal 8%;
-Hydroelectic 7%;

The 2015 natural gas mix of Italy. (Total consumptions 67.5 Gmc3, +9.1% in comparison with 2014, calculated at a 38,1 MJ/mc):    
-Domestic Production 10% (steady);
-Russian Federation 44.5% (during the first half of 2016, on the raise by 5.35);
-Norway and Hollande 15.75%;
-Algeria 10.5%;
-Libya 10.5%;
-Qatar and others GNL 9%;

Taking into account the cancellation of the South Stream project and the freezing of the Turkish Stream – two infrastructural projects in the interest of Southern Europe and the Balkans – the Russians have proposed to double the Nord Stream I pipeline, which implementation will lead Germany to be the main European gas hub.
On June 27th, the President of Turkey, R.T. Erdogan, sent a letter of apoligize to the President of the Russian Federation, V. Putin, in which he expressed his condolences for the death of the Russian pilot. In addition, he pointed out that the Russian Federation is a “friend State and a strategic partner of Turkey”. The letter served as a prelude to the good outcome of the summit of August 9, 2016 between the two leaders which was held in St. Petersburg, during which, as stated in the final press conference, Turkey said to be “ready to supply Russian gas to Europe by relaunching the project for the construction of the Turkish Stream gas pipeline, a decision hailed by Putin as positive. On the sidelines of the meeting between Putin and Erdogan, Russian Energy Minister Aleksandr Novak said that works on the first section of the Turkish Stream gas pipeline will be completed in the second half of 2019. Novak also confirmed that talks have already started between Gazprom and the Turkish party for the gas pipeline. "Without European guarantees, only the first part of the gas pipeline can be dealt with", specified the Minister.