In October, oil prices significantly increased to around $4-5/b similar to what occurred in September too. In particular, Brent North Sea quality opened at $56.10/b and closed at $61.18/b, while West Texas Intermediate opened at $50.90/b and closed at $54.88/b. Thus, on October 27th, Brent overcame the threshold of $60/b for the first time in more than two years. At the time of writing, Brent and WTI were respectively pricing at $63.42/b and at $56.89/b in the wake of the domestic political tensions regarding the Saudis Crown. The price gap between the European and Asian benchmark and the American reference, which has been persisting at around $5-6/b, is almost entirely the consequence of the hurricanes in the Unites States, whose main effect was to decrease the refinery demand so, the WTI price. Moreover, it is interesting to put into light that this price spread determined an increase in the U.S. crude exports, which reached 2,000,000 b/d at the beginning of the month (2,300,000 b/d at the beginning of November). If we exclude on October 6th, when both qualities touched their monthly low respectively, pricing $55.52/b and $49.23/b as oil kept on ships in the North Sea rose by nearly 3,000,000 barrels to just over 5,400,000 barrels, the upward trend of prices was fundamentally steady during the entire month due to the following reasons:
1. The U.S. tight oil growth production seems to be slower than previously estimated. In fact, according to the data provided by the Energy Information Administration on September 30th, the U.S. Federal energy experts reviewed the fall of 178,500 b/d of July’s output, and of approximately 220,000 b/d of June’s production;
2. Global stocks are decreasing. Especially, since the beginning of 2017, the U.S. inventories have decreased by 17,000,000 barrels, while in 2016 they increased by 21,000,000 barrels.
3. The geopolitical difficulties with some OPEC producers as Libya and Venezuela with the addition of the fighting between Baghdad and the Kurdish Regional Government in the Iraqi oil city of Kirkuk, on October 16th;
4. In 2017, oil demand is forecast to grow by 1,600,000 b/d;
5. On October 26th, Bloomberg anticipated that U.S. President, Donald Trump, was ready to appoint Jerome Powell as the successor of current FED Governor, Janet Yellen whose term as Chair will end in February 2018. Powell, who is currently a member of the Federal Reserve Board of Governors, will guarantee the continuity of a monetary policy based on a gradual increase in the U.S. interest rates.
In the wake of this news, the dollar appreciated over the euro, moving from 1.1785 €/$ on October 25th to 1.1638 €/$ on October 31st. At the time of writing the €/$ exchange rate was quoting at 1.1603 €/$. With regard to the rouble trend, in October, the Russian currency was steady, both over the euro and over the dollar. In particular, the rouble lightly appreciated towards the European currency moving from 68.0395 rouble/€ to 67.8738 rouble/€ and lightly depreciated over the green banknote opening at 57.9355 rouble/$ and closing at 58.3208 rouble/$. In accordance with the Ministry of Economic Development of the Russian Federation, Maxim Oreshkin, the Russian economy is predicted to grow at 2.1%, both in 2017 and in 2018 while annual inflation has slowed to 2.7%, which is "a record low in Russia’s entire history" the Russian President, Vladimir Putin, stated. "The inflation rate will be lower than the targeted 4%", added at the Russia Calling Investment Forum.
Latest data and estimates on oil & gas
According to the data provided by the Oil Market Report published by the Energy Information Administration on October 12th, the global oil supply slightly increased by 90,000 b/d in September, reaching 97,500,000 b/d, due to the non-OPEC higher production. The OPEC output was unchanged at 32,650,000 b/d, maintaining in compliance at 86% with the output reduction agreement. The same Report states that in the OECD countries, the five-year average inventories decreased from 318,000,000 barrels at the end of January 2017 to the current level of 170,000,000 barrels despite the increase of China’s strategic stocks. On October 24th, Saudi Oil Minister, Khaled al-Faleh, quoted that "When we get closer to that (five-year average) we will decide how we smoothly exit the current arrangement, maybe go to a different arrangement to keep supply and demand closely balanced so we don’t have a return to higher inventories. We have reduced the inventories by over 180 million barrels and we still have about 160 million barrels according to numbers I have seen last. The intent is to keep our hands on the wheel between now and until we get to a balanced market and beyond, we are not going to do anything that is going to disrupt the path we are on". Global oil demand is still estimated to grow by 1,600,000 b/d in 2017 and 1,400,000 b/d in 2018. In September, for the second time in its history, China imported 37,000,000 t of oil – equivalent to 9,000,000 b/d. Based on the figures of the Drilling Productivity Report published by the Energy Information Administration on October 16th, the American unconventional output is expected to increase by 81,000 b/d to 6,120,000 b/d in November. 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 9,553,000 b/d, which was reached on October 27th 2017 (weekly forecasts). According to the data provided by Baker Hughes on November 3rd, the 898 current U.S. active rigs, of which 729 (81.2%) are oil rigs and 169 (18.8%) are gas rigs, were 42 less in comparison with the data published on September 29th due to the hurricanes, which hit the Mexican Gulf. In August 2017, the U.S. crude oil imports increased at 7,890,000 b/d. They were 7,825,000 b/d in July, 8,010,000 b/d in June, 8,397,000 b/d in May, 8,131,000 b/d in April, 8,048,000 b/d in March, 7,890,000 b/d in February and 8,435,000 b/d in January (a record since August 2012). Now, the current 2017 U.S. average crude oil imports of 8,078,000 b/d are 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.
Geopolitics of Oil & Natural Gas
Waiting for the next OPEC meeting on November 30th 2017, the financial difficulties (profitability) that the North American frackers are currently facing – in addition to the willingness of, both the Saudis and the Russians, to extend the 2016 November agreement to the entire 2018 – may contribute to stabilize and to sustain the current barrel prices.
According to Bloomberg, despite an increase in oil prices, Exxon Mobil fracking activity "lost money for an 11th consecutive quarter".In the 3rd quarter of 2017, the losses were equivalent to equivalent $238,000,000, while Chevron lost $26,000,000. The Russian Federation and Saudi Arabia have each earned $40,000,000,000 from the 2016 deal, claimed Kirill Dmitriev, CEO of the Russian Direct Investment Fund. International efforts to stabilize oil prices "have been fruitful, bringing oil prices to above $55 per barrel", Dmitriev told Rossiya 24 news channel. "We believe that without this deal [that will expire on March 31st 2018], prices would be below $35 per barrel now", he added. On October 10th, the head of the Organization of the Petroleum Exporting Countries, Mohammed Barkindo, encouraged U.S. shale producers to help reduce the global oil supply. "We urge our friends, in the shale basins of North America to take this shared responsibility with all seriousness it deserves, as one of the key lessons learned from the current unique supply-driven cycle", said Barkindo. "At the moment we (OPEC and independent U.S. producers) both agree that we have a shared responsibility in maintaining stability because they are also not insulated from the impact of this downturn", Barkindo said. "The call by independents themselves (is) that we need to continue this interaction", he added. On October 19th, during the Eurasiatic Forum in Verona, the CEO of Rosneft, Igor Sechin, stated that the 5 largest U.S. shale oil companies had a negative free cash flow in 28 quarters out of 29 despite the fact that they had invested more than $50.000.000.000 in the previous years, a 1/3 more than the investment initially scheduled. Sechin specified that the cash flow of these companies will be positive starting from 2020, but the precondition is that oil prices will be higher than $70/b before this date. Between the patience of the investors or low barrel prices, which one will be finished first? To partially answer the question, frackers should possibly take into account Barkindo’s suggestion.