In May, the oil price gap between the two most important benchmarks exceeded 11 $/b – that is a record high in three years – due to the Iranian crisis and the increase in U.S. tight production. In particular, Brent North Sea quality opened the transactions at $73.33/b and closed at $77.62/b, while West Texas Intermediate opened its negotiations at $67.47/b, closing at $66.69/b. At the time of writing, Brent was trading at $75.77/b and WTI at $64.94/b, in the wake of Iran’s crude oil exports data, which hit 2,700,000 b/d in May, higher than its average volumes over the past year and despite the announcement of U.S sanctions.
On May 23rd, the European and Asian benchmark reached $79.71/b, the highest since November 2014, whereas the American grade hit its maximum at $72.63/b on May 21st.
The strong bullish barrel trend, which occurred during the first three weeks of the month, was the direct consequence of factors dealing with geopolitics and oil supply:
1. On May 8th, the President of the United States of America, Donald Trump, declared the withdrawal of his country from the Joint Comprehensive Plan of Action regulating Iran’s nuclear activities and the reintroduction of sanctions against Teheran. With regard to the crude market, it means that between 200,000 b/d and 1,000,000 b/d of Iranian oil exports are estimated, by analysts, to be at risk. At the moment, Iran is exporting an average of 2,400,000 b/d;
2. On May 18th, for a second week in a row, the U.S. commercial stocks decreased from 435,955,000 barrels to 432,354,000 barrels;
3. At the same time, according to a Barclays report, the Venezuelan crude output may fall below 1,000,000 b/d in the coming months from an April level of 1,500,000 b/d;
4. On May 22nd, following the re-election of President Nicolas Maduro, D. Trump imposed sanctions over Venezuela too. In particular, the U.S. President prohibited the West financial system to purchase Venezuela’s debt, including Petroleos de Venezuela SA, the Latin American nation’s state-owned oil company.
During the last week of May, barrel prices decreased due to the following issues:
1. Hedge funds cut their net-long positions (purchase). According to the ICE Futures Europe, on May 21st, they reduced their Brent net-long positions by 3.7% to 548,555 contracts. At the same time, based on the U.S. Commodity Futures Trading Commission, the WTI net-long positions dropped by 6.2% to 385,283 agreements;
2. On May 25th, the U.S. crude inventories rose from 432,354,000 barrels to 438,132,000 barrels.
Based on the data provided by the International Energy Agency, OPEC and non-OPEC producers – after having started their supply cuts in January 2017 – achieved their goal to wipe out the global oversupply, with inventories falling by 1,000,000 stocks below their five-year average for the first time since 2014.
During the International Economic Forum (SPIEF) that took place in St. Petersburg from May 24th to 26th, the President of the Russian Federation, Vladimir Putin, stated that “we’re not interested in an endless rise in the price of energy and oil. If you asked me what a fair price is, I would say we’re perfectly happy with $60/b”. Anything above that price, “can lead to certain problems for consumers, which also isn’t good for producers. What will happen next will depend on the Iran nuclear deal and how that affects the world energy market”.
Latest data and estimates on oil & gas
According to the figures published by the Oil Market Report on May 16th, global oil supply was steady in April at approximately 98,000,000 b/d. OPEC crude production lowered by 130,000 b/d – to 31,650,000 b/d – due to further declines in Venezuela and lower output in African producers.
In March, OECD inventories diminished by 26,800,000 barrels to 2,819,000,000 barrels, their lowest level since March 2015 and 214,000,000 barrels below a year-ago.
Global oil demand is estimated to grow by 1,400,000 b/d in 2018, to 99,200,000 b/d, slightly downwards from 1,500,000 b/d previously forecast due to higher oil prices. “The recent jump in oil prices will take its toll”, said the International Energy Agency, while OPEC’s report remains more bullish, showing a rise in oil demand at around 1,650,000 b/d.
Based on the Drilling Productivity Report data published by the Energy Information Administration on May 14th, the American unconventional output is expected to increase by 144,000 b/d to 7,178,000 b/d in June.
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 10,769,000 b/d, which was reached on May 25th 2018 (weekly forecasts).
Thanks to the figures provided by Baker Hughes on May 25th, the 1,059 current U.S. active rigs, of which 859 (81.1%, the maximum since August 4th) are oil rigs and 198 (18.7%) are gas rigs plus 2 miscellaneous (0.2%), were 38 more in comparison with the data published on April 27th, due to the increase in barrel prices.
However, as it was written in our last report, it must be taken into account that for some frackers a financial issue is probably looming. This is due to the fact that, on May 17th, the 10-year U.S. Treasury yield reached 3.112% for the first time since January 2014 and the Federal Reserve intends to raise the interest rates in the next months.
In March 2018, the U.S. crude oil imports increased to 7,616,000 b/d. They were 7,493,000 b/d in February and 8,012,000 b/d in January. The 2017 U.S. average crude oil imports of 7,912,000 b/d are 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.
According to the Chinese General Administration of Customs, in April, China imported 9,640,000 b/d of crude oil, that is 4% more than in March and beat the former record of 9,610,000 b/d reached in January.
China’s main supplier was Russia’s largest oil producer, state-controlled Rosneft, whose net profits reached $1,300,000 during the first quarter 2018, jumping sevenfold in comparison with the same period in 2017.
However, China has become an oil exporter too. In particular, the country, which was an importer of petroleum products till 2016, has exported 26,000,000 t of refined products during the last 12 months, the same amount as South Korea, Kuwait and India.
Geopolitics of Oil & Gas
It seems that the majority of the financial analysts – and the politicians too – are rightly focused on understanding how the breakdown in the Iran Nuclear Deal will affect oil prices and the oil market balance.
However, there is another import issue that needs to be examined: what might be the most important geopolical outcome of the U.S. withdrawal from the agreement upon mentioned?
Firstly, it is fundamental to put into light the fact that China buys 25% of the Iranian oil exports, which accounts for 8% of its needs, while Asia is the most important Iranian shipment destination (in order of amount, respectively China, India, and South Korea) before Europe.
In accordance with Bloomberg, the yuan-denominated oil future issued in the Shanghai Stock Exchange last winter may be one of the tools that Iran would use in order to bypass the U.S. sanctions.
At the same time, China may grab the opportunity to increase the alternative or parallel cash option to the dollar, paying crude with its currency, thus strengthening its strategic influence step by step.
“The sanctions can potentially accelerate this process of establishing a 3rd (oil) benchmark”, stated senior vice president for derivatives in Singapore at financial services firm INTL FCStone, Barry White.
It would not be by chance if, during the first week of May, the yuan oil future reached $75.40/b – the converted dollar record high – growing faster than rival benchmarks Brent and WTI.