The bearish effect of geopolitical events

The bearish effect of geopolitical events

Demostenes Floros | Geopolitical and economic analyst
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As oil prices fall, global demand is expected to grow, both in the second half of 2018 and in 2019. In the current year, Asia is driving the increase in demand thanks to the estimated 900,000 b/d

In July, barrel prices significantly decreased. In particular, Brent North Sea quality opened the negotiations at 77.4 $/b and closed at 74.2 $/b, while West Texas Intermediate opened the transactions at 74.03 $/b, closing at 67.45 $/b.

At the time of writing, Brent was pricing at $73.49/b and WTI at $67.70/b, because of U.S. stockpiles data, which raised by 3,800,000 barrels.

Both the European and Asian benchmark, and the American grade reached their monthly high on July 10th, respectively quoting 78.88 $/b and 74.16 $/b (close to the highest in three years). As highlighted by the International Energy Agency, this could be due to fears that the supply increase decided by the OPEC + group on June 23rd would not be enough to counterbalance the losses from Venezuela and Iran. In fact, according to IEA, Venezuela’s production capacity could drop by 1,000,000 b/d by the end of 2018 (- 40%). Parallely, Iranian shipments to Europe have already fallen by 50%, because of U.S. sanctions.

Furthermore, on July 11th, geopolitical tensions rose when U.S. President, Donald Trump, with regard to natural gas supplies, stated that Germany is “captive” to Russia. In reality, Germany isn’t any more dependent on Russian gas than it was before. Nowadays, the Russian Federation accounts for approximately 40% of Germany’s gas imports, but the share was even higher during the Cold War (West Germany).

In addition, the United States imported an average of 384,000 b/d of crude oil and products (3.8% of total imports) from Russia in 2017.

Based on Oilprice.com, assuming an average price of $50/b, it means that the U.S. spent about $7 billion on Russian oil in the previous year.

Halfway through July, both oil quality prices decreased, respectively lowering to 71.6 $/b and 67.64 $/b on July 17th, because of the following issues:

1.   Libya, Nigeria and Canada were able to increase their output;

2.   The trade war between the U.S. and China might negatively affect oil demand during the second half of the current year. Based on the Chinese National Statistic Department, the Real Gross Domestic Product of China increased by 6.7% during the second quarter of 2018 in comparison with the same period of 2017.

 

At the end of the month, the price-gap between Brent and WTI increased by more than 6.5 $/b probably because Saudi Arabia’s suspension of shipments through a key Red Sea transit route. This affected the European and Asian benchmark more than the American grade.

After the withdrawal of the United States of America from the Iran nuclear deal, which was reached in 2015, U.S. President, Donald Trump, on July 31st, stated that he would be willing to meet Iranian President, Hassan Rouhani, with “no preconditions”.

In the wake of the Trump/Putin meeting, that occurred in Helsinki in mid-July, the impression is that geopolitics could have a bearish effect on barrel prices during the second half of 2018. “I would certainly meet with Iran if they wanted to meet”, D. Trump stated on July 30th, during a joint press conference at the White House with Italian Prime Minister, Giuseppe Conte. Trump was also quoted saying, “I don’t know if they’re ready. They’re having a hard time”.

Latest data and estimates on oil & gas

According to the data provided by the Oil Market Report, published by the Energy Information Administration on July 12th, global oil supply increased by 370,000 b/d in June mainly due to higher Saudi Arabian and Russian production in the wake of the OPEC + Group agreement achieved last month, in Vienna. In particular, OPEC crude output reached 31,870,000 b/d in June (four-month high), because the increase in Saudi Arabia production more than offset losses in Angola, Libya, and Venezuela. Especially, the Saudis, increased their output by more than 430,000 b/d to 10,890,000 in June, the most in three years, exceeding their maximum quota that should have been 10,058,000 b/d.

As it was anticipated in our previous monthly report, Iranian Oil Minister, Bijan Zanganeh, expressed his disappointment to his Saudi counterpart, Khalid Al Falih, and to the current OPEC President on duty, Suahil Al Mazrouei, from the United Arab Emirates.

In May, OECD commercial stocks rose by 13,900,000 barrels to 2,840,000,000 barrels. However, OECD inventories were 23,000,000 barrels below the five-year average, while preliminary data show stocks falling in June too.

Global oil demand is forecast to grow by 1,400,000 b/d, both in 2018, and in 2019, unchanged from the last month EIA’s report. In the current year, Asia has been leading the demand surge with estimated 900,000 b/d.

Based on the Drilling Productivity Report data published by the Energy Information Administration on July 16th, the American unconventional output is expected to increase by 143,000 b/d to 7,470,000 b/d in August.

The U.S. crude production, after the peak of 9,627,000 b/d gained in April 2015, decreased to its lowest of 8,428,000 b/d on July 1st 2016. It then started increasing to 11,000,000 b/d, which was reached on July 20th 2018 (weekly forecasts).

Nevertheless, according to Bloomberg, U.S. oil output may not be growing as fast as it was previously estimated. Real, the American frackers extracted 10,442,000 b/d in May approximately, 300,000 b/d less than the EIA had forecast.

Thanks to the figures provided by Baker Hughes on July 27th, the 1,048 current U.S. active rigs, of which 861 (82.2%) are oil rigs and 186 (17.7%) are gas rigs plus 1 miscellaneous (0.1%), were 1 more in comparison with the data published on June 29th, probably because the U.S. tight oil growth output will stop in the next 3-4 months due to a limit related to the pipeline transport capacity of the raw material as it was anticipated in our June’s report too.

In May, U.S. crude oil imports decreased to 7,825,000 b/d. They were 8,244,000 b/d in April, 7,616,000 b/d in March, 7,493,000 b/d in February and 8,012,000 b/d in January. Currently, the 2018 U.S. average crude oil imports stands at 7,838,000 b/d. It was 7,912,000 b/d in 2017, slightly higher than the 7,850,000 b/d marked during 2016, which is on the rise if compared with the 7,344,000 b/d imported in 2014 and the 7,363,000 b/d in 2015.

Geopolitics of Oil & Gas

The meeting on July 16th between U.S. President, D. Trump, and Russian President, Vladimir Putin, in Helsinki sparked a lot of criticism especially among the American establishment, NATO, and the European Union’s elites.

How did the most important Italian newspaper describe this political event?

On July 18th, La Repubblica published an article – entitled “Putin’s american friend”. The author, Thomas L. Friedman, leader writer of the New York Times, wrote that “Such behavior by an American president is so perverse, so contrary to American interests and values, that it leads to only one conclusion: Donald Trump is either an asset of Russian intelligence or really enjoys playing one on TV. Everything that happened in Helsinki only reinforces that conclusion. [...].

On July 23rd, La Stampa published an article – entitled “If the Trump-Putin alliance is an opportunity for Italy”. The author, Giampiero Massolo, suggested that “a more organic and politically demanding form of our design that would lead us [...] to pursue normalization with Russia on a substantially national basis, even outside Atlantic coordination and the European consensus, which the Italian side could even try to block unilaterally. At the same time seeking fruitful relations with the White House”.

According to T.L. Friedman, the current U.S. President would be a sort of puppet in Putin’s hands and a danger for the democracy of the United States too. In reality, the author is advising the American and European elites to reject any political agreement, which would possibly emerge between the two nuclear super powers in the forthcoming future as a consequence of the Trump-Putin bilateral.

Unlike La Repubblica, the newspaper La Stampa seems to have a different approach to the same issue, highlighting the chances that Italy would have in this new geopolitical context.

Most likely, G. Massolo is highlighting that our country may play a role of pivot in terms of stabilization, development and political balance not only inside the Mediterranean Sea, but also between the Russian Federation and the United States. Taking into account that the possible implementation of this policy would certainly spark further frictions inside NATO and the European Union, the author is counselling to the current Italian government to carry on its self-government agenda with the help of some U.S. economic sectors as Financial Funds Bridgewater, Aqr, Glg, Ahl, Citi, JP Morgan, Blackrock, Pimco, Prudential and Dodge & Cox politically, close to the White House.

In the wake of the 2016 November OPEC & non-OPEC oil agreement, on January 12th 2017, it was published an Abo-About Oil Report which highlighted that with the appointment of Rex Tillerson, former CEO of Exxon Mobil, as U.S. Secretary of State by President Donald Trump, it should be clear that the new cold war between the Russian Federation and the United States of America really ended. Indeed, Tillerson is well known for being a Russian friend with which stipulated profitable businesses during the past years. This should restore the relations between the two countries on a path of mutual trust that could guarantee a great deal, both in Ukraine, and in the Middle East. Economist Giuseppe Masala suggested calling these possible historical events as the Oil Pax.

Since then, despite the firing of R. Tillerson and some disputes, as the one with regard to the Nord Stream II pipeline project, the possibility for cooperation between the two countries has appeared, as stated by Russian President, V. Putin, during the Helsinki press conference with the U.S. counterpart: “I believe that we, as the largest oil and gas powers, could work constructively to regulate international markets, because we are not interested in acute prices drops, because producers will suffer from this, including shale oil and gas projects in the United States”. Furthermore, the reaching of a new oil deal by the so-called OPEC + Group on June 22nd/23rd 2018 in Vienna has strengthened this path.

In the meantime, Italy has already started to play a sort of key “bridge” role as the following operations in the energy market demonstrates:

1.   On December 7th 2016, with regard to the privatization of 19.5% Rosneft’s capital, Italy’s bridge role consisted in pledging a financial operation supported by the Italian Bank, Intesa San Paolo;

2.   On December 12th 2016, ENI sold to Rosneft 30% of Shorouk natural gas field for an amount of $1,570,000,000. On May 17th 2017, ENI and Rosneft subscribed a Cooperation Agreement;

3.   On March 21st 2017, the two upon mentioned majors signed a Memorandum of Understanding;

4.   On March 9th 2017, ENI sold to ExxonMobil 25% share parcel of Area 4 located in the Mozambique explorative offshore, for an amount of approximately $2,800,000,000;

5.   On June 2nd 2017, Italian enterprise Maire Tecnimont – in cooperation with Chinese Sinopec – and Russian Gazprom reached a deal for the amount of $4,000,000,000 for the gas treatment in the Amur Region, in the Russian East, close to the border with China, that will directly involve the Italian Investment Fund – Cassa Depositi e Prestiti.

 

Italy has indeed the possibility to strengthen its international political role. At the same time, it has not be excluded that this opportunity could possibly turn into a nightmare scenario for the current government especially, if the guide lines of its foreign policy cannot be clarified. With regard to this issue, the Interior Minister, Matteo Salvini, said that the rapprochement between the U.S. and Russia is good news for Italy and for Europe – specifying that based on the referendum, 90% of the people voted for the return of the Crimea to the Russian Federation – while the Italian Foreign Minister, Enzo Moavero Milanesi, expressed the opposite political position, saying that Italy did not recognize the regional authorities designated in March 2014.

In conclusion, it has to be remembered that, on December 27th 2016, former U.S. Secretary of State, Henry Kissinger, gave to the newly appointed U.S. President D. Trump specific advise, regarding the American foreign policy. Especially, a report published in the German tabloid Der Bild headlined, “Kissinger to prevent new Cold War”, claimed the former envoy was working towards a new relationship with Russia. This would involve the United States accepting that the Crimea now belongs to Moscow.