Oil and currency trends
In January, barrel prices strongly increased, because OPEC+ members have been starting to implement the Vienna agreement reached on November 30th 2018. During that meeting, oil producers decided to cut production by 1,200,000 b/d in the first half of 2018, with the aim of removing the oversupply in the oil market.
In the first month of 2019, Brent North Sea quality opened the quotations at $54.75/b and closed at $61.06/b, while West Texas Intermediate opened the listings at $46.6/b, closing at $54.15/b. Both the European and Asian benchmark and the American grade reached their monthly high on January 21st – respectively, quoting $62.83/b and $54.19/b – even in the wake of the political crisis that has sparked in Venezuela, where the world’s biggest crude reserves are held. At the time of writing (February 8th), barrel prices were increasing in the wake of the news that Saudi Arabia slashed shipments to the United States from 528,000 b/d to 442,000 b/d during the second half of January. This represents the lowest total amount in more than two years.
In addition to the OPEC+ deal and the turmoil in the Latin American country, another bullish factor was a slight depreciation of the dollar and the impression that the Federal Reserve will not implement a strong tightening monetary policy in 2019 as it was previously supposed.
At the same time, it has to be taken into account that the oil market has been characterized by bearish factors too. Especially, as follows:
1. On January 11th 2019, the U.S. producers extracted the record of 11,900,000 b/d. Nevertheless, there are signs – especially, the active rigs trend – that U.S. tight and shale output will slow its growth in 2019;
2. In 2018, China’s economy is estimated to expand by 6.6%, which would be the slowest annual pace since 1990.
According to a report published by the International Monetary Fund on January 21st, world economy is estimated to grow by 3.5% in 2019 and by 3.6% in 2020. Those are respectively, 0.2% and 0.1% points below the previous forecasts issued in October 2018 and the second downturn revision in three months. “Global growth is expanding at a healthy rate, but we are seeing a slowing momentum”, the IMF’s head of research Gita Gopinath said, adding that there were “many important downside risks to the global economy”.
If global growth pose a threat to the oil demand, the new U.S. sanctions imposed against Petroleos de Venezuela SA on January 29th will bring another supply risk to the market, increasing its volatility.
It probably is not by chance that the world gold demand reached 4,345.1 t in 2018, up 4% year-over-year according to the World Gold Council report. The annual surge was driven by central banks, which added 651.5 t of gold reserves in 2018, up 74% in comparison with 2017, with net purchases jumping to their highest level since the end of the U.S. dollar convertibility into gold in 1971. At the same time, the Russian Central Bank led global gold acquisitions, having sold almost all of its U.S. Treasury bonds in order to buy 274.3 tons of gold, becoming the world’s fifth largest holder behind the United States of America, Germany, France and Italy.
Last, but not least, Russian foreign reserves increased by 8.3%, growing from 432 billion dollars in 2017 to 468 billion dollars in 2018.
Latest data and estimates on oil & gas
Thanks to the figures provided by the Oil Market Report, published by the International Energy Agency on January 18th 2019, world oil supply dropped by 950,000 b/d in December, to 100,600,000 b/d. In particular, OPEC output fell by 590,000 b/d, to 32,390,000 b/d. OECD commercial stocks decreased by 2,500,000 barrels in November (month over month) to 2,857,000,000 barrels, but increased by 12,000,000 barrels in comparison with 2017.
Global oil demand growth in 2018 and 2019 is respectively forecast at 1,300,000 b/d and 1,400,000 b/d. Especially, China and India should provide 62% of the total surge.
Based on the Drilling Productivity Report figures issued by the Energy Information Administration on January 22nd, the American unconventional crude output is expected to increase by 62,000 b/d to 8,179,000 b/d in February 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 2015. It then started increasing to 11,900,000 b/d, which was reached on January 11th 2019 and maintained during the entire month (weekly forecasts, publication date, 7 days after).
Thanks to the statistics provided by Baker Hughes on February 1st 2019, the 1.045 current U.S. active rigs, of which 847 (81.1%) are oilrigs and 198 (18.9%) are gas rigs, were 30 less than January 4th 2018, the lowest level since May 2018 and the worst monthly setback for American explorations in almost three years. Despite the nearly two-month highs increase in barrel prices, U.S. frackers have not yet restarted their drilling expansion due to a lack of confidence determined by an increase in expenditures.
In November, U.S. crude oil imports increased to 7,903,000 b/d. Previously, they were 7,312,000 b/d in October, 7,589,000 b/d in September, 8,000,000 b/d in August, 7,923,000 b/d in July, 8,480,000 b/d in June (monthly record high in 2018), 7,825,000 b/d in May, 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. crude oil imports average stands at 7,854,000 b/d. It was 7,969,000 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
Based on the statistics provided by the Organization of the Petroleum Exporting Countries, Venezuela has the largest oil reserves with 303 billion barrels of recoverable oil.
During the Presidency of Hugo Chavez (1999-2013), the country steadily produced between 2,400,000/2,800,000 b/d. In 2003, an attempt of coup d’état supported by the United States and having the aim of overthrowing Chavez, led to a brief drastic drop of the production, which lowered to approximately 700,000 b/d.
In 2013, Nicolas Maduro took office. Since 2016, Venezuela’s output has been starting to fall. Despite the fact that the Latin American country can extract 1,970,000 b/d according to OPEC’s quotas, it is currently producing 1,150,000 b/d (-33,000 b/d in comparison with November 2018) due to both domestic and foreign factors. Among the latters, the measures imposed by the United States are having the biggest impact. It is estimated that these economic sanctions will freeze 7 billion dollars in assets and determine more than 11 billion dollars in lost export revenues in 2019. It is also important to highlight that barrel exports account for 98% of Venezuela’s export earnings and as much as 50% of its GDP.
Since the beginning of Chavez’s era, the Russian Federation has been strengthening its economic ties with Venezuela in the energy, agricultural and defense sector. From 2005 to 2013, the two countries signed 30 deals in the military sector. Specifically, during that period, Venezuela bought Russian military equipment for an ammount of 11 billion dollars.
Furthermore, the Russian oil company Rosneft has currently five joint upstream projects with PDVSA in Venezuela. The major led by Igor Sechin has 6 billion dollars of loans towards PDVSA, which should be repaid them with crude oil supplies by the end of 2019. However, in accordance with S&P Global Platts, as of November 2018, the Venezuelan State company paid off approximately half of its current debt.
China also has a strong commercial partnership with Venezuela, which seems to be complementary with the Russian one, rather than competitive. Over the last decade, Beijing provided Caracas with 50 billion dollars. Venezuela has repaid 30 out of 50 billion dollars of this debt with crude, but based on Caracas Capital, it has not liquidated a sovereign bond since December 2017.
On January 30th 2019, Ellen R. Wald, a nonresident senior fellow at the Atlantic Council’s Global Energy Center and president of Transversal Consulting, wrote an article, pubblished by Bloomberg, suggesting that “the quickest way for Venezuela to put its oil to work for the benefit of the people is to change its Chavez-era hydrocarbon law and permit companies other than PDVSA to develop its reserves. […]. But none of these steps will be possible unless any new government can find a way to renegotiate its vast foreign debts. PDVSA is struggling to pay the interest on debt owned by Rosneft. The collateral on that debt consists of a 49.9% share of Citgo, the American-based gas refiner and marketer. […]. A new administration in Caracas would be wise to approach Washington to facilitate the purchase of the debt with better terms by a U.S. investor”.
The day before, Dmitry Peskov, spokesman of the Russia President, Vladimir Putin, made clear that Russia will defend its interests in Venezuela within the international law using “all mechanisms available to us”.
The impression is that someone desperately needs Venezuela to become the geopolitical arena for comparing the Sino-Russian interests with the North American ones. The political and economic consequences of the wars in Libya, Syria and Ukraine towards Europe probably did not teach enough to the most important members of the European Union, which unhesitatingly supported Trump’s decision to recognize Juan Guaidó as the new President of Venezuela. Favourably, the Italian government and in particular, Pope Francis, whose political position over the Latin American country also represents the cut of the Vatican’s “umbilical cord” with the West, took a wise stance, calling for a dialogue between Venezuela’s legitimate government and its opposition, excluding the resort of force.