Greater Eurasia and the (new) energy routes

Greater Eurasia and the (new) energy routes

Demostenes Floros | Geopolitical and economic analyst
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In recent years, we have witnessed the emergence of a geo-economic center in Eurasia, that is being structured around Russia and China. A new development pole that wants and can become an alternative to the Euro-Atlantic center. Gas is above all

According to preliminary data provided by Gazprom, in 2018, Russia’s state-own major exported to the European Union plus Turkey 201.8 Gm3 of natural gas (calorific power: 37.053 MJ/m3), that is three times more than the total volume supplied by all LNG producers to Europe. In 2018, “the share of gas supplies to the EU countries and Turkey has reached an all-time high and totaled 36.7%” (34.2% in 2017), stated the director general of Gazprom Export, Elena Burmistrova, at Gazprom’s Investor Day event, which took place in Singapore on February 28th. Burmistrova specified that the 2018 average price was 245.5 dollars for 1,000 m3 of natural gas in comparison with 167 dollars for 1,000 m3  in 2017 (+24.6% y-o-y).

As pointed out by Bloomberg on February 15th, the main reason for Russia’s increasing role as the natural gas supply leader of Europe is that the European domestic production has been steadily decreasing especially after the Netherlands, which is the second European producer after Norway, has become a net importer of gas for the first year since it has started extractions from the Groningen field in 1963.

In Singapore, Gazprom gave also notice that the pipeline Power of Siberia is close to being finished. Thanks to this new infrastructure, starting from December 1st 2019, Russia will deliver to China 38 Gm3 of natural gas annually for a period of 30 years and a total amount estimated in approximately 1 trillion m3. The contract signed in May 2014 by the two countries is a take or pay oil-link with an estimated worth value of 400 billion dollars.

However, on February 28th, Bloomberg underlined that Gazprom lost investor appeal during the last few years, especially because high cost investments reduced the possibility of higher dividend payouts. Moreover, in the next future, the company should have face other issues as sanctions imposed by U.S. and EU and the increasing competition of LNG.

Based on Oilprice.com statistics, in 2018, China imported 90.39 million tons of gas [equal to 122.9 Gm3, calorific power: 39 MJ/m3], solidifying China’s position as the world leader importer of the fuel. Due to this data, Novatek, which is the largest liquefied natural gas (LNG) producer in Russia, is planning to build an LNG terminal on the Kamchatka Peninsula in Russia’s Far East in order to boost supplies to the fast-growing Asian market (Japan is the second largest global gas importer). “If we dream for a while, then the hub we plan in Kamchatka with a capacity of 120 million tons may also become one of gas sales indices in the Asia-Pacific”, stated Leonid Mikhelson, Novatek’s Chief Executive Officer.

With regard to the 2019 liquefied natural gas market, there could be a risk of an oversupply. In fact, according to Jason Feer, head of Business Intelligence at Poten & Partners, global LNG supply is estimated to grow by 33 million tons, while demand is forecast to absorb only 16 million tons of gas. In mid February, the first signal of this issue emerged in the Asian spot LNG prices, which dropped to the lowest since September 2017.

“I am almost certain that in ten years there will be two economic-geopolitical centers in the world: Greater America and Greater Eurasia. In recent years, we have witnessed the emergence of a geo-economic center in Eurasia, against the backdrop of the new cold war. A center that is being structured around Russia and China and that should not be seen as a simple defensive alliance, but rather as a new development pole that wants and can become an alternative to the Euro-Atlantic center. It is inevitable for Russia to carve out its own space in the great Eurasia. In whose center, of course, there will be China” said Sergey Karaganov, Chairman of the Russian Defense and Foreign Policy, in the course of a interview released to the Italian geopolitical monthly review LIMES on December 4th 2018.

Oil and currency trends

In February, oil prices rose. In particular, Brent North Sea quality started the negotiations at $62.91/b and closed at $66.45/b, while West Texas Intermediate opened the transactions at $55.67/b, closing at $57.25/b. Since the beginning of 2019, barrel prices have surged by approximately 26%. At the time of writing (March 8th), Brent crude trade price was fundamentally unchanged, while WTI price was lightly on the fall because U.S. commercial inventories surged (+7,069,000 barrels on March 1st).

On February 11th, both crude qualities lowered to their monthly minimum, Brent pricing at $61.97/b and WTI trading at $52.82/b, because U.S. crude stocks increased from 445,944,000 barrels on January 25th to 454,512,000 barrels on February 15th.

On February 20th, both the European and Asian benchmark, and the American grade reached their monthly high, respectively quoting at $67.14/b (the highest in three months) and $57.27/b, due to the following reasons:

In January 2019, Saudi Arabia extracted 10,200,000 b/d (it was 11,090,000 b/d in November 2018), cutting its output by an amount that was higher than that decided during the OPEC Plus meeting in Vienna at the end of 2018;

The signals of a thaw in U.S.-China trade tensions that would have a positive impact on global oil demand.

During the last week of February, barrel prices firstly decreased, because U.S. oil production topped the record of 12,100,000 b/d, while President, Donald Trump, tweeted “Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike - fragile!” However, Saudis oil Minister, Khalid Al Falih, stated on February 12th that his country would have decreased its output to 9,800,000 b/d in March. At the same time, the Minister added that Saudi Arabia would reduce its exports to 6,900,000 b/d (they were 8,200,000 b/d in November 2018).

“OPEC Again Faces Choice Between Trump’s Wrath and Oil Slump”, entitled Bloomberg on February 26th.

Finally, barrel prices closed on the rise, because U.S. stocks dropped by 8,647,000 barrels to 445,860,000 barrels (on February 22nd).

In the months to come, two geopolitical factors will certainly influence the price of oil.

Firstly, the Venezuelan production and especially the capacity of the troubled Latin American country to find new buyers in order to sell its heavy quality oil that needs, both specific refinery facilities and products to thin out its crude. In particular, Venezuelan state-own oil company PDVSA needs heavy naphtha, which is currently provided by Russia’s state-controlled major Rosneft after the sanctions were imposed by the United States. Since the beginning of the crisis, India – which is one of the main purchaser of Venezuelan oil with 400.000 b/d – has not decreased its imports, sparking the anger of U.S. National Security Advisor, John Bolton, who tweeted on February 12th “nations and firms that support Maduro’s theft of Venezuelan resources will not be forgotten.

Secondly, on February 5th, U.S. Special Representative for Iran, Brian Hook, said that Iran’s oil customers should not expect new waivers in May 2019 after those granted by the United States in november 2018 to the following coutries: China, India, Japan, South Korea, Turkey, Italy, Greece. However, in mid-January, during the Atlantic Council’s 2019 Global Energy Forum in Abu Dhabi, Hook stated that“We did not want to lift the price of oil, and we were successful doing that”.

Based on the U.S. Treasury Department data, in 2018, the Gross Domestic Product (GDP) of the United States increased by 2.9% and the national Debt reached 22.01 trillion dollars, 2.06 trillion dollars more since Donald Trump has officially taken office in January 2017. At the same time, the U.S. Congressional Budget Office calculated that the state deficit skyrocketed to 779 billion dollars while the trade deficit hit a 10-year record high of 621 billion dollars according to the U.S. Commerce Department. Furthermore, the private debt of the Americans topped the record of 15.5 billion dollars based on a report issued on February 13th by the Federal Reserve Bank of New York.

Thanks to the National Bureau of Statistics of China, China’s 2018 GDP grew by 6.6%, reaching 13.6 billion dollars. This economic expansion – 76.2% of which was dragged by domestic consumption – represents 30% of the 2018 world growth and amounts to 1.4 trillion dollars, that is higher than Australia’s 2018 GDP of 1.32 billion dollars.

Based on the World Bank data, Russia’s 2018 GDP and inflation respectively increased by 1.6% and 4.2%. Thanks to infographics presented by Russian President, Vladimir Putin, during the Federal Assembly in Moscow on February 20th, the country’s foreign Debt stands at 453.7 billion dollars (-12.4% y-o-y), while Russia’s international reserve funds amount to 475 billion dollars as of February 8th 2019. “For the first time in history our reserves fully cover foreign debt, including government and commercial sector debt”, Putin said.

Latest data and estimates on oil & gas

In accordance with the figures provided by the Oil Market Report published by the International Energy Agency on February 13th, world supply fell by 1,400,000 b/d in January to 99,700,000 b/d. At the same time, OPEC crude output diminished by 930,000 b/d at 30,830,000 b/d, close to a four-year low.

Global growth demand is expected to rise by 1,400,000 b/d in 2019.

The U.S. crude production, after the former 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 12,100,000 b/d, which was reached on February 22nd 2019 (weekly forecasts, publication date, 7 days after).

Thanks to the statistics provided by Baker Hughes on March 1st 2019, the 1,038 current U.S. active rigs, of which 843 (81.2%) are oilrigs and 195 (18.8%) are gas rigs, were 7 less than February 1st 2018, the lowest level since May 2018.

Despite the increase in barrel prices and the recent record output achieved by the U.S. shale industry, on February 24th, the Wall Street Journal wrote that the unconventional sector has been losing its faith. Specifically, in 2018, it issued only 22 billion dollars in bond and equity deals, more than 50% less in comparison with the 2016 levels when barrel prices were lower than current prices too. Taken as a whole, drillings are not profitable the WSJ concluded.

Two days later, during the International Petroleum Week conference in London, the head of British energy major BP, Bob Dudley, with regard to the shale sector said, “The US is probably the only country that completely responds to market signals like a market without a brain. It just responds to price signals. Unlike Saudi Arabia and Russia, which adjust their output in response to gluts or shortages in oil supplies, the US shale market responds purely to oil prices”.

In December, U.S. crude oil imports strongly decreased to 7,099,000 b/d. The 2018 U.S. crude oil imports average stands at 7,757,000 b/d. It was 7,969,000 b/d in 2017, 7,850,000 b/d in 2016, 7,363,000 b/d in 2015 and 7,344,000 b/d in 2014.