In October, oil prices were volatile. In particular, Brent Crude North Sea opened at $/50.75b and closed at $/48.51b, while West Texas Intermediate opened at $/49.25b and closed at $/46.79b. At the time of writing, oil prices were decreasing respectively, at $46.95/b and $45.35/b in the wake of the data reported by the Energy Information Administration, which inventories report showed an unexpectedly large build of 14.4 million barrels in the United States during the week ending October 28th– the largest increase ever registered in 34 years of statistics.
The European and Asian benchmark has reached its record high in the last year at $52.9/b on October 10th, while the American reference has climbed at $51.64/b on October 19th, the maximum since June 2016.
In spite of the fact that the dollar appreciated over the euro, quoting 1.1236 on October 3rd to 1.0872 on October 25th, the highest strengthening since March 2nd, three factors explained the increasing trend of the barrel during the first 25 days of the month:
-After the indications reached during the International Energy Forum in Algeria on September 26th/28th, there were further talks between OPEC Members and the Russian Federation with regard to the concrete possibility to carry out an oil cut production during the next meeting in Vienna on November 30th. The Russian President, Vladimir Putin, stated at the World Energy Congress in Istanbul on October 10th that his country will join the deal: "we support the recent initiative of OPEC to fix oil production limits. We hope that at the OPEC meeting in November, the idea will be embodied in an official agreement, giving a positive signal to the markets and investors. The demand for traditional energy supported not only the motorization and electrification of such huge countries and economies as China and India, but also by the continuing participation of oil and gas products in the most diverse areas of human life, in industrial processes";
-In accordance to the Energy Information Administration, the U.S. oil stockpiles decreased by 553 thousand barrels to 468.2 million barrels on October 21th, the lowest since January 2016. Despite the fact that the total stock amount is still very high, this bearish trend has been carrying on for two months;
-According to the U.S. Commodity Futures Trading Commission, during the first week of October the hedge funds increased their long net speculative positions (purchase of paper barrel), both over Brent, and WTI by 142 million barrels. The sum of futures and options reached 612 million barrels and closed at the previous high from April 2016 (656 million barrels) approximately, 7 times more the daily oil global output. On October 18th, thanks to the reduction in the net speculative positions too (selling), the long net bets reached 699 million barrels, a record high since July 2014 when Brent and WTI – despite the beginning of their looming bearish trend – quoted at the end of that month respectively, $107.37/b and $100.64/b;
On the contrary, the bearish trend that characterized oil prices during the last days of October was because more members of the Organization of the Petroleum Exporting Countries – as Iraq, which is the second producer with approximately 4.6 million b/d and Nigeria – stated that they want an exemption from the November’s agreement to curb crude output. In fact, during the International Energy Forum, OPEC decided to exempt Iran and Libya hit by sanctions and war consequences. It seems that Nigeria is relieved too. In this scenario, investors are becoming more skeptical about the prospects to reach a real deal.
In October, the Russian currency stood stable over the American currency. In particular, the rouble/dollar exchange rate opened at 62.30 rouble/$. On October 25th, the Russian currency hit its record high since October 23rd 2015, appreciating at 62.08 rouble/$. It then slightly depreciated over the green banknote, trading at 63.26 rouble/$ at the end of the month, after the Russian Central Bank kept key interest rate unchanged at 10% on October 28th. In spite of the fact that the country’s Gross Domestic Product is forecast to drop by 0.5-0.7% in 2016 the Governor, Elvira Nabiullina, who pointed out that it might cut rates in the first or second quarter of next year, decided not to change the monetary policy due to the following factors:
-Thanks to the higher than expected oil prices, the decline in inflation, which is still high, was lower in comparison with the strengthening of the national currency;
-The increasing demand for Russian government bonds due to the so-called, carry trade when the investors borrow where rates are low and invest in higher yielding securities. In particular, the rate on 10-year bonds dropped two basis points to 8.34% on October 24th. In reality, with ultra-low key rates set by the Central Banks of Europe, UK, Japan and the US, the Russian government obligations are currently extremely attractive for investors. "The carry trade is pushing both the ruble and the OFZs (10-year bonds) higher as the European Central Bank remains on the easing side and the Fed doesn’t sound hawkish", said Alexander Losev, CEO at Sputnik Asset Management in Moscow, to Bloomberg.
If the Federal Reserve decides to tighten its monetary policy before the end of the current year, as many analysts are suggesting, the appreciation of the rouble over the dollar may overthrow this strengthening tendency.
There were further talks between OPEC Members and the Russian Federation with regard to the concrete possibility to carry out an oil cut production during the next meeting in Vienna on November 30
Latest date and estimates on Oil & Gas
According to the data published by the Oil Market Report on October 11th, global oil supply increased by 0.6 million b/d in September. Non-OPEC production rose by approximately 0.5 million b/d on higher Russian and Kazakh outputs. In particular, the Russian Federation smashed the post-Soviet record, averaging 11.2 million b/d. At the same time, OPEC reached an all-time high at 33.64 million b/d (+160 thousand b/d) as Iraq pumped at the highest ever and Libya reopened its ports. The first estimates of October show an OPEC output of 33.82 million b/d. World oil output was at 97.2 million b/d, 0.2 million b/d up year-on-year due to strong OPEC growth (0.9 million b/d).
Non-OPEC supply is forecast to drop by 0.9 million b/d in 2016 before rebounding by 0.4 million b/d in 2017, while global demand is estimated to expand by 1.2 million b/d, both in 2016, and in 2017.
Especially Asia has been leading the global oil demand with record high oil imports. In September, China – which crude output plunged 9.8% to 3.89 million b/d, closing to the lowest figure in six years – purchased 8.08 million b/d, 18% more in comparison with the same period of 2015, overcoming the U.S. imports (7.98 million b/d) for the third time during the last 12 months. At the same time, India reached its maximum with 4.47 million b/d imports, 17.7% more y-o-y.
If on one side, it is true that Chinese strong demand is referable to the increasing of strategic oil reserves on the other hand, there is the support of its economic growth at around 6.7% during the 3rd quarter of 2016 (+2.7% U.S. GDP). Taking into account that the National Bureau of Statistics of China estimates an annual GDP growth between 6.5-7%, this is a positive factor in order to obtain the rebalance in the oil market during the first half of 2017. In reality, the Oil Report suggests that the supply-demand outlook may remain in oversupply through the first half of next year, unless OPEC and the Russian Federation will ratify, in all likelihood, during the next meeting on November 30th in Vienna. If this scenario takes place, the market’s rebalancing could come faster.
Based on the figures published by the Energy Information Administration on October 17th, the American unconventional output is expected to decline by 30 thousand b/d in October. The U.S. crude production, after the peak of 9.7 million b/d in April 2015, decreased to 8.522 million b/d on October 28th but, according to the data provided by Baker Hughes, the total number of oilrigs (553) has been starting to rise again thanks to the light increase in oil prices. This situation has led to a small addition in output at around 58 thousand b/d during the last two weeks of October (590 thousand b/d less y-o-y).
Especially Asia has been leading the global oil demand with record high oil imports. In September, China purchased 8.08 million b/d, 18% more in comparison with the same period of 2015
Geopolitics of Oil
During the World Energy Forum in Istanbul, the CEO of Saudi Aramco, Amin Nasser, calls for a new energy roadmap. Especially, he stated, "we must continue making adequate and timely investments in the supply of fossil fuels". With regard to the necessity to increase oil prices in order to face the future investments in the oil sector, it seems that the Russians and Saudis are expressing the same position.
Are we facing a sort of energy peace agreement that can prelude to a political deal in the Middle East too?
In reality, all the main world crude producers – Saudi Arabia, the Russian Federation, the United States of America, as well as big drillers like Iraq and Iran – are engaged in one or different wars. Therefore, they all need more money not only to support their economic plans and the future investments in the energy sector, but to sustain their war expenditures too. Specifically, Saudi Arabia – which reached a State Deficit of $97 billion in 2015, equal to 15% of its GDP, a record high since 1991 – is losing the war, both in Syria where, on the contrary, Russia is winning, and in Yemen too.
Maybe, Riyadh will have to wait for the first statements from the new tenant in the White House, while the Kremlin could take a breath in particular, if Saudi Arabia and the other Persian Gulf producers will be ready to cut oil output by at least 4%, as it seems that they had said at a closed-door meeting.