On July 2nd 2019, OPEC+ decided to prolong its production cuts for a total amount of 1,200,000 b/d till March 31st 2019 (9 months). The cuts were agreed upon December 7th 2018 and they remained in force from January 1st 2019 to June 30th 2019. To be more specific, the deal foresaw that the Organization of the Petroleum Exporting Countries (OPEC) should have reduced its extractions by 800,000 b/d (in reality, it exceeded that level especially due to Saudis higher production), while the non-OPEC producers slashed the output by 400,000 b/d, 228,000 b/d of which were produced by the Russian Federation. Nigeria, Venezuela and Iran were exonerated by the agreement and they will continue to be exempted during the next 9 months too.
From a geopolitical point of view, the most important event that occurred during the course of the last meeting was the institutionalization of the OPEC+ meeting on July 3rd 2019. The goal of this new institution is to influence the oil market “sine die”. Till today, the OPEC+ has consisted of 24 members (14 OPEC producers and 10 non-OPEC producers), which adhered to the Cooperation Chart.
In order to understand the historical meaning of this event it is necessary to take a step back.
On June 22nd 2019, Saudis Oil Minister, Khalid Al-Falih, “invited Russia to join [OPEC] as an observer, an associated member. We believe they are considering it. I can assure that the entire membership of OPEC would welcome Russia”. Russian Energy Minister, Aleksandr Novak, confirmed that there was “such an option”, and Moscow was “studying it closely”.
Clearly, Bloomberg, aware that OPEC+ had already been put into place for the first time on November 30th 2016 (cutting 1,800,000 b/d, excluding Iran) due to the Russian victory in the Syrian war, entitling: Russia-Saudi Plans for Super-OPEC Could Reshape Global Order.
In fact, on June 30th 2018, OPEC+ led by the Russians and the Saudis decided to increase its oil production by 1,000,000 b/d as a consequence of the U.S. withdrawal from the Joint Comprehensive Plan of Action, which had an aim to regulate Iranian nuclear activities, decreed by Donald Trump on May 5th 2018 and in virtue of the new U.S. sanctions (not ONU’s) imposed towards Iranian oil exports. To be more precise, those sanctions should have come into force as of November 5th 2018 (the relative waivers should have been granted a couple of days before, remaining in place until May 2nd 2019).
According to some analysts, the institutionalization of the OPEC+ would highlight OPEC’s loss of power, because currently the Organization contributes less than 30% of the global oil supply. This consideration is not groundless, but partial, because it does not point out the fundamental aspect of the issue that is the following: OPEC+ confirms the centrality of the Russian Federation, both as the world energy leader exporter (beginning from oil and gas), and as an indispensable geopolitical actor of the rising multi-polar international architecture, as clearly emerged during the G20 in Osaka, Japan, on June 28th-29th 2019. Russia’s entry into the Syrian war on November 30th 2015 changed the destiny of the conflict, allowing Moscow to become the balance needle of the oil market, as well as the mediator between the Saudi Arabia and Iran fight.
Secondly, the OPEC+ rise strengthens the coordination of the conventional producers’ policies towards the recent challenge of the so called non-conventional producers (Russia’s and Saudi Arabia’s exports approximately covered 25% of the global crude exports). Undoubtedly, the conventional producers could strongly influence the oil market due to lower extraction costs than those sustained by the North American frackers. “I have no doubt that U.S. shale oil will reach a peak of production, then to a plateau and eventually decline – stated the Saudi [Khalid Al-Falih, on the sidelines of the last meeting in Vienna] – The problem is when”.
Waiting that the parliaments of the 24 OPEC+ members ratify the Cooperation Chart, China rejected again the U.S. sanctions imposed towards the Iranian crude exports, which dropped to 400,000 b/d in May 2019 compared to an output of 2,300,000 b/d. Especially, China restarted the imports from Teheran, which arrived on June 26th 2019 at the Jinxi complex, owned and operated by the State giant China National Petroleum Corporation (CNPC). “We do not support the US policy of reducing Iran’s oil exports to zero”, said Fu Cong, director-general of the Chinese foreign ministry’s department of arms control in Vienna.
Historically, Saudi Arabia is considered the global swing producer, because it is able to openly limit its output in order to satisfy the fluctuations of market demand thus, bringing supply and global demand in balance. During the last years, thanks to the implementation of the fracking technique, many analysts forecast that the United States of America will have substitute or, at least matched, Saudi Arabia in this role. Taking into account the rise of the OPEC+ and that China has become the world leader in oil import, the impression is that Saudi Arabia already shares the responsibility as swing producer with the Russian Federation rather than with the United States.
Expecting that China’s growing imports of Russia’s crude will make Moscow the swing producer par excellence.
Latest data and estimates on oil & gas
Thanks to the figures provided by the Oil Market Report, published in the International Energy Agency on June 14th 2019, world oil supply decreased by 100,000 b/d in May 2019 to 99,500,000 b/d, down 2,800,000 b/d from the 2018 November peak. In particular, OPEC crude output diminished under 30,000,000 b/d in May 2019, the lowest level since 2014, as Iranian supply plunged due to sanctions and the lowering of Saudi and Nigerian output. OECD commercial stocks rose by 15,800,000 barrels in April 2019 (month over month) to a total of 2,883,000,000 barrels.
The 2019 global oil demand growth has been cut for the second consecutive month at 1,200,000 b/d, while it is estimated to rise by 1,400,000 b/d in 2020.
Based on the Drilling Productivity Report figures issued by the Energy Information Administration on June 17th 2019, the American unconventional crude output is estimated to increase by 70,000 b/d to 8,520,000 b/d in July 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 the record of 12,400,000 b/d, which was reached on May 31th 2019, before lowering again to 12,200,000 b/d on June 28th 2019 (weekly forecasts).
Thanks to the statistics provided by Baker Hughes on July 3rd 2019, the 963 current U.S. active rigs, of which 788 (81.8%) are oilrigs and 174 (18.1%) are gas rigs + 1 miscellaneous (0.1%), were 25 less than June 7th 2019, the lowest level since February 2nd 2018. On June 24th 2019, oilprice.com highlighted that “The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions. […]. Nearly every American has benefited from shale gas, with one big exception, the shale gas investors”, said Steve Schlotterbeck, former chief executive of EQT, a shale gas giant, during a petrochemicals conference in Pittsburgh.
In April, U.S. crude oil imports surged by 266,000 b/d to 7,025,000 b/d. They were 6,759,000 b/d in March 2019, 6,652,000 b/d in February 2019 and 7,520,000 b/d in January 2019. The 2019 U.S. crude oil imports average stands at 6,989,000 b/d, on the fall in comparison with 7,757,000 b/d in 2018 and approximately at the same 2017 level (7,969,000 b/d).
Oil and currency trends
In June 2019, barrel prices strongly increased at around $5.5/b. In particular, Brent North Sea quality started the negotiations at $61.21/b and closed at $66.71/b, while West Texas Intermediate opened the quotations at $52.97/b, closing at $58.20/b. At the time of writing (on July 16th 2019), Brent was trading at $67/b and WTI at $60.41/b.
Both the European and Asian benchmark and the American grade rose due to the following economic and geopolitical factors:
1. After having reached their lowest level since 1990 at 485,470,000 barrels on June 7th, U.S. stocks further decreased to 469,576,000 barrels on June 21st (-15,890,400 barrels), the biggest decline that has occurred in American supplies since September 2016. In the wake of this data published by the Energy Information Administration on June 26th, WTI gained its monthly high, trading at $59.70/b;
2. After having reached its record output at 12,400,000 b/d on May 31st, U.S. extractions decreased to 12,100,000 b/d on June 21st;
3. On June 20th, the Iranian military shot down a U.S. drone over the Strait of Hormuz, in the Persian Gulf. According to Tehran, the drone violated Iran’s airspace. On the contrary, Washington claimed it was in international air space;
4. In May 2019, the Russian Federation decreased its extractions to 11,110,000 b/d, bringing its output under the level agreed on with the OPEC+ in December 2018 (11,180,000 b/d). To be more precise, Russian supplies transported through the Druzhba pipeline, which connects Russia with central Europe, have reduced since April 2019 because of the contaminated oil.
On June 29th, U.S. President, Donald Trump, met his Chinese counterpart, Xi Jinping during the G20 in Tokyo. With regard to the trade deal between the two economic superpowers, Trump and Xi decided to reopen the dialogue. If they obtain an agreement in the course of the next weeks, it will certainly have a positive impact on oil demand.
The positive correlation that also exists between Chinese oil demand trend and Brent prices (estimated at 79%, ceteris paribus), in addition with the OPEC+ cuts roll over established in Vienna on July 1st 2019, will presumably support barrel prices in the second half of the current year.