During the first month of 2018, oil prices rose because the Organization of the Petroleum Exporting Countries - headed by Saudi Arabia - and the non-OPEC crude producers - led by the Russian Federation - complied with their output limits at a rate of 125% in December, up from 122% a month earlier. Particularly, Brent North Sea quality opened the negotiations at $66.57/b and closed at $69.05/b, while West Texas Intermediate blend opened at $60.37/b, closing at $64.73/b.
On January 24th, the European and Asian benchmark reached $70.75/b, its record high since December 2014, whilst the American reference priced $66.12/b on January 26th, its highest in 37 months. The light decrease in barrel prices, which occurred during the last week of January, was due to the increase in U.S. rigs (11) and U.S. stocks (6,780,000 barrels) the latter, for the first time since November 2017.
At the time of writing, Brent was trading at $64.72/b and WTI was quoting at $61.17/b due to the latest Report issued by the Energy Information Administration on January 31st, which underlined that the U.S. oil output surged to 10,038,000 b/d in November 2017 for the first time in more than 40 years. Moreover, the Bloomberg Dollar Spot Index added as much as 1% and the Brent/WTI price-gap in April closed at $3.29/b (the smallest since August).
The bullish monthly trend of oil was the consequence of different economic and geopolitical factors, among which:
1. According to the data exposed by the International Monetary Fund on January 23rd during the Forum in Davos (Switzerland), world economy will rise in 2018 by 3.7% thus, steady supporting oil demand growth too. In fact, based on the figures issued by the International Energy Agency on January 9th, global oil demand is forecast to rise by 1,700,000 b/d, both in 2018, and in 2019, after having increased by 1,400,000 b/d in 2017.
2. Based on the weekly data published by the U.S. Energy information Administration, the American crude stockpiles shrank from 424,462,000 barrels on December 29th 2017 to 411,583,000 barrels on January 19th 2018, the lowest level since February 2015, as refiners boosted operating rates to the highest level in more than a decade. Especially, U.S. inventories fell for 10th week in a row in the longest stretch of declines on record dropping to their lowest since December 2014. Then, American crude in storage tanks and terminals jumped by 6,780,000 barrels on January 26th.
OECD commercial inventories dropped as well, falling from 137,000,000 barrels to 133,000,000 barrels above the 5-year average.
3. In accordance with the figures shown by the Commodity Futures Trading Commission, the hedge funds increased their WTI net-long speculative position by 2.9% to 496,111 futures and options contracts during the week ended on January 23rd, the highest level since 2006.
Parallely, the Brent net-long speculative positions rose by 2.4% to 584,707 contracts, which is an ever record-high.
4. According to the Bloomberg Spot Dollar Index, the U.S. dollar dropped for a 7th straight week, the longest stretch of declines since 2010.
5. Last, but not least, with regard to geopolitics, the turmoils occurred at the beginning of the year in Iran, which is OPEC’s third-largest oil producer, in addition with Venezuela’s economic problems, that are affecting its extractions and exports, supported the barrel prices too. Especially, in the Latin American country, oil production reached 1,160,000 b/d in December, the lowest level in 30 years.
The depreciation of the dollar, in addition to the bullish speculative role of hedge funds, contributed to the strong recovery of the American blend, with the consequence that the Brent/WTI price-gap narrowed to approximately $4/b at the end of January.
Despite the recent price gains, will the output cuts decided by OPEC and non-OPEC producers in November 2016 and prolonged in November 2017 continue until the end of the current year or will they stop in mid-2018 due to the achievement of the market rebalancing as some rumors hinted?
On January 13th, Iraqi Oil Minister, Jabbar al-Luaibi, stated, "There are some sources here and there indicating that the market is flourishing now, the prices are healthy, so let’s talk about terminating the freeze. This is the wrong judgment, and we don’t agree with such a concept".
Latest data and estimates on oil & gas
According to the data provided by the Oil Market Report published by the International Energy Agency on January 19th, global oil supply lowered by 405,000 b/d to 97,700,000 b/d in December due to lower North Sea and Venezuelan output. In fact, OPEC crude production decreased to 32,230,000 b/d.
Based on Drilling Productivity Report figures published by the Energy Information Administration on January 16th, the American unconventional output is expected to increase by 111,000 b/d to 6,549,000 b/d in February.
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 10,251,000 b/d, which was reached on February 2nd 2018 (weekly forecasts).
In accordance with the data provided by Baker Hughes on February 2nd, the 946 current U.S. active rigs, of which 765 (80.9%, the maximum since August 4th) are oil rigs and 181 (19.1%) are gas rigs, were 17 more in comparison with the data published on December 29th due to the increasing in oil prices.
In November 2017, the U.S. crude oil imports lightly increased to 7,623,000 b/d. They were 7,611,000 b/d in October 7,275,000 b/d in September, 7,890,000 b/d in August, 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).
The 2017 U.S. average crude oil imports of 7,921,000 b/d (waiting the December’s data) are slightly 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 the 7,363,000 b/d in 2015.
On January 12th, Bloomberg pointed out that the two-year U.S. Treasury yield jumped above 2%, raising for 6 consecutive quarters, the longest stretch since 2000, marking a rebound to a key psychological level last seen just as the U.S. sank into the depths of the financial crisis in September 2008.
On January 30th, the U.S. ten-year Treasury yields reached 2.7199%, a record high since April 4th 2014. At the time of writing, it was quoting at 2.8621%.
Will the Federal Reserve affect the 2018 U.S. frackers’ output as it gradually increases the interest rates, starting from next March?
According to the estimates issued by the latest publications, the answer is no, but Gazprom Export’s review, Blue Fuel, seems to be out of tune. In particular, Valery Nemov, Deputy Head of Contract Structuring and Price Formation Directorate, who wrote "The today reality is that the number of wells is increasing, the production is increasing, but at the expense of the companies enormous spendings. They use any available possibility to increase drilling, as in case one is not doing that, the other will do. It reminds deadly race, the second round of it. In this race, the prime rule is drill or die. [...]. Natural gas in US cannot be considered separately from oil [...]. Assuming the current financial situation, the output increase seems to be a procrastination of the end of the shale boom. We are about to see who is the winner in the race when the moment will come to pay the bills".
On February 2nd, the publication of ExxonMobil and Chevron’s 2017 fourth-quarter financial data seemed to give credit to Nemov’s consideration. In fact, despite the increase in oil prices and U.S. tight oil/shale gas production, ExxonMobil’s profits decreased by 2.2% to $3,730,000,000, while Chevron’s gains reached $1,100,000,000, even if the consensus was waiting for $1,220,000,000.
Geopolitics of Oil & Natural Gas
The title of the last Economist’s cover was "The next war". According to former Italian and NATO General, Francesco Sisci, the geopolitical analysis that was brought into light by the British review is objective because "It gives a detailed account of the military preparations for a probable rather than possible war, firstly against China and secondly against Russia. It provides objective facts in need of interpretation, and I would read them as a semi-official announcement of the beginning of the Second Cold War."
Will this scenario affect Italy too?
Taking into account that Italy will have its political elections next March 4th, Sisci’s answer is "undoubtedly yes". In particular, the General underlines that the Italian parties, which today are against the European Union, will be ostracize [by Bruxelles and Washington] and that the United States of America and the EU will support whoever assume a pro-European and an anti-Russian political position.
I would suggest the following two issues to the next Italian Prime Minister.
Firstly, as was anticipated in our previous monthly report and also pointed out by Bloomberg on January 12th, the crown of the world’s biggest oil importer now sits firmly atop China after the nation’s shipments surpassed the U.S. on an annual basis for the first time ever (8,430,000 b/d in 2017, data from China’s General Administration of Customs). Moreover, China is also the largest buyer of American crude.
Moreover, the Russian Federation strengthened its leader position as the biggest supplier to China. Based on Chinese General Administration of Customs November figures, Russia supplied 5,120,000 tons of crude to China, equal to 1,300,000 b/d and is estimated to boost exports to the country by 200,000 b/d in 2018 (FGE data).
Secondly, the Russian Federation is the top European and Italian natural gas supplier, while its energy weight will probably increase in the next years. In accordance with the World Gold Council, Russia is the third world gold producer with its central bank purchasing from domestic miners through commercial banks. In December, the CBR raised its reserves by 9.3 t of gold, bringing its total amount to 1,838.211 t ($76,000,000,000 in monetary terms).
The future Italian Prime Minister must weigh carefully the new world force relations, keeping an eye on the energy too.