In June, oil prices decreased. In particular, Brent North Sea quality opened at $50.25/b and closed at $47.90/b, while West Texas Intermediate opened at $48.18/b and closed at $46.20/b. At the time of writing, Brent crude was trading at $46.88/b, while WTI was quoting at $44.47/b in the wake of July’s first weekly data related to the U.S. production trend that shows a new rise at 9,338,000 b/d.
On June 21st, both the European and Asian benchmark and the American reference reached their 8-month low, respectively pricing $44.79/b and $42.25/b due to the following reasons:
1. During the first part of the month, global oil inventories (OSCE area) exceeded again 3 billion barrels. Especially, after two months during which U.S. oil stockpiles decreased by 25.600.000 barrels, they unexpectedly rose;
2. Both Nigeria, and Libya – which are exempted by the November 2016 agreement – increased their extractions, adding into the market 375,000 b/d;
3. On June 16th, the U.S. oil production has reached 9,350,000 b/d for the first time since August 2015 thanks to the fracking activity.
The light recovery verified during the last week of June was because the U.S. crude stocks decreased by 2,500,000 barrels and the gasoline inventories by 578,000 barrels according to the Energy Information Administration. At the same time, U.S. oil extractions temporarily diminished by 100,000 b/d to 9,250,000 b/d. In the course of June, the €/$ exchange rate opened at 1.1219 €/$ and closed at 1.1417 €/$ despite the fact that the Federal Reserve increased its interest rates by 25 basis points, bringing them into the range of 1-1.25% on June 15th. This was the second rise implemented by FED in 2017 after the first one on March 15th and it was clearly expected by the market. Therefore, the depreciation of the green banknote in the second part of the month was probably due to investors estimating a future strengthening in the U.S. Central Bank monetary policy, which softened in comparison to the forecast at the beginning of 2017.
This is a result of some macroeconomic data, which are putting into light that the economy in the United States is not in very good shape. For example, consumption trend, which determine 2/3 of U.S. GDP – is weak. However, the 10-Year U.S. Treasury Debt interest rate raised from 2.1256% on June 14th to 2.3037% on June 29th. The drop in oil prices slightly put pressure over the rouble. In fact, the rouble/$ exchange rate opened at 56.62 rouble/$ and closed at 58.96 rouble/$. Having said this, we have to take into account that the Russian Central Bank cut its key interest rate by 25 basis points on June 23rd, bringing it from 9.25% to 9% since the Governor, Elvira Nabiullina, verified that annual inflation had neared its long-awaited goal of 4%.
Moreover, according to the Finance Minister of the Russian Federation, Anton Siluanov, the Russian budget has adjusted to oil price swings, and the non-energy fiscal deficit has dropped too: “we see the budget deficit, calculated without oil and gas revenues, has fallen. This shows the stability of our budget to various changes in the external economic environment”.
The drop in oil prices slightly put pressure over the rouble. In fact, the rouble/$ exchange rate opened at 56.62 rouble/$ and closed at 58.96 rouble/$.
Data and forecasts on OPEC and non-OPEC countries
According to the data provided by the Oil Market Report, published by the Energy Information Administration on June 14th, global oil supply increased by 585,000 b/d in May reaching 96,690,000 b/d as both OPEC and non-OPEC countries pumped more. In particular, OPEC crude output rose by 290,000 b/d to 32,080,000 b/d, due to the increase in Libya’s and Nigeria’s output. The other Members of the Cartel have complied with the November 2016 agreement by approximately 96%. Global demand is estimated to grow by 1,300,000 b/d in 2017. Based on the figures of the Drilling Productivity Report, published by the Energy Information Administration on June 12th, the American unconventional output is expected to increase by 127,000 b/d to 5,475,000 b/d in July. 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 9,350,000 b/d, which was reached on June 16th 2017, but then it has unexpectedly dropped for the first time since June/July 2016 by 100,000 b/d. In fact, according to the data provided by Baker Hughes , also the total current number of U.S. rigs – 940 of which, 756 (80.4%) are oil rigs and 184 (19.6%) are gas rigs, on June 30th – have been dropping for the first fall in U.S. drilling activity since January 2017. In April 2017, the U.S. crude oil imports increased at 8,131,000 b/d. They were 8,048,000 b/d in March, 7,890,000 b/d in February and 8,435,000 b/d in January (record since August 2012). Now, the current 2017 average crude oil imports of 8,126,000 b/d is clearly higher than the 7,877,000 b/d marked during 2016, which is on the rise if compared with the 7,344,000 b/d imported in 2014 and 7,363,000 b/d in 2015.
However, these data should be compared with the record high of 1,300,000 b/d reached by the U.S. exports (especially, refined products) in the course of the last week of May. Furthermore, it is interesting to put into light that the U.S. inventories – which are one of the most important data that the market currently seems to analyse in order to determine oil price trends – have been falling with difficulty but, at the same time, U.S. crude imports are on the rise too. The impression, therefore, is that the market pays attention to some certain data, but disregards other data. To conclude, despite the fact that the U.S. unconventional production has raised since October 2016, some clouds are looming on the horizon.
Based on the study published on May 3rd by Amir Azar, researcher at the U.S. Center on Global Energy Policy – before the last increase of FED’s interest rates – the financial costs of a big amount of small and medium U.S. enterprises engaged in the hydraulic fracturing would be unsustainable. In fact, we must take into account that these financial costs cover from 20% to 35% of the total fracking sector costs. At the same time, the costs of production referable to sand cost and to the drilling facilities rent – in addition with the bring into use again of wells less productive and with higher break-even costs than those that are currently being exploited – have been increasing while productivity into the sector has stop to gain grounds in the Permian Basin too.
The Persian Gulf crisis and the role of energy
On June 5th, Saudi Arabia, United Arab Emirates, Egypt, Bahrain and Yemen cut their diplomatic ties with Qatar officially, due to the links between Doha and some terroristic organizations. Really, what is the political reason, which lay behind this choice? Does energy play a central role in this geopolitical game? Last, but not least, is there any connection between Trump’s speech addressed to the Arab States, in Riyadh, on May 21st, and this crisis, which has been involving Iran too ?
Firstly, to answer these questions, we need to find the turning point of this political turmoil that is the winning of the Syrian army – loyal to President Bashar Al-Assad – with the military help of Iran, Hezbollah and in particular, of the Russian Federation, in the Syrian war. On the contrary, the Petro Monarchies as Saudi Arabia, UAE and Qatar, which financed different jihadist groups – from the so-called “moderate rebels” to the Muslim Brotherhood as ISIS and al-Nusra too – lost the conflict with the consequence that now, they need to reposition their foreign policy as soon as possible. This is the main reason that has been sparking conflicting interests among countries, which are OPEC Members too. Secondly, energy certainly plays a key role and Qatar is both an oil and gas producer. As an OPEC Member, it extracts approximately 620,000 b/d, but liquefied natural gas wealth has allowed the country to form its foreign policy, independent from the Saudis, because Qatar is the world LNG exporter leader with 77,200,000 tons produced in 2016 – equivalent to 1/3 of the global supply – according to the data provided by the International Gas Union.
In regard to Italy, with 5.8 Gmc3 of gas, Qatar became the third Italian supplier in 2016 after the Russian Federation (27 Gmc3) and Algeria (19.1 Gmc3) based on the statistics published by Mise. In December 2016, we wrote that the Russian Oil Company Rosneft sold 19.5% of its share capital to a joint consortium made up by Glencore and Qatar Investment Fund (QIF) for €10.500.000.000 ($11.300.000.000) with the financial support of a pool of banks (including Russian banks) led by the Italian Intesa Sanpaolo . From a geopolitical point of view, we should put into light that this financial investment was reached because Russia won the war in Syria and Qatar decided to abandon the terrorist groups to their destiny due to the unsuccessful aim of overthrowing President al-Assad. At the same time, Russia achieved two goals: Qatar, which was a military enemy on the ground, has become an economic partner. Moreover, Kremlin “inextricably unified the energy policies of the two world biggest natural gas producers [exporters]” as former French agent, Thierry Meyssan, pointed out.
Moreover, Qatar’s offshore North Field, which provides all the country’s gas, is shared with Iran. So, on the one hand Doha hosts the U.S. Central Command, on the other hand it has to take into account that it bought a $2,700,000,000 stake in Russia’s oil major Rosneft and has a narrow gas energy relation with Teheran.
In fact, at the moment, the recent decision not to cut gas supplies to the United Arab Emirates – despite the diplomatic dispute between the Gulf States – is part of the “force majeure” clause in the Dolphin gas pipeline agreement, stated Saad Sherida al-Kaabi, Chief Executive of state-run Qatar Petroleum. According to this contract, the Qataris daily pump 57,000,000 mc3 of gas to the UAE.
Global demand is estimated to grow by 1,300,000 b/d in 2017. Based on the figures of the Drilling Productivity Report, published by the Energy Information Administration on June 12th, the American unconventional output is expected to increase by 127,000 b/d to 5,475,000 b/d in July.
The weight of the United States
With regard to the new U.S. Administration strategy, during his speech on May 21st, in Riyadh, President Donald Trump strengthened again the links between his country and the Arab States in particular, with Saudi Arabia but – at the same time – asked to its major Arab allies to stop financing the jihadists, focusing their attention over the threat represented by Iran. In this way, Trump obtained two goals. With regard to the U.S. domestic policy, Trump respected what he promised during his Presidential campaign about the war against terrorism, penetrating and loosening the political links between the Clinton’s and Saudi Arabia too.
Concerning the U.S. foreign policy, he obtained the approval and the support of Israel, which is the strongest Iranian rival in the region. In reality, the Commander in Chief of the United States of America does not want to tear the Iranian nuclear deal agreement, but to create a sort of stabilization between the different regional powers with the aim of moving one part of the U.S. army – currently, stationed in the Middle East – over the Pacific and in particular, towards China. The agreement – dealing with the exploitation of the South Pars gas field 11 – reached by French Total, Chinese CNPC and Iranian Petropars seems to confirm that the new Administration wants to respect the Joint Comprehensive Plan of Action. To conclude, if barrel prices fell to their lowest level since November 2016 in spite of the supply cuts by OPEC and Russia and the geopolitical tensions in the Middle East between Qatar and the other Petromonarchies have a bearish effect, the main reason is that the real global economic activity is slowdowning.