In December, oil prices rose in the wake of the extension of the OPEC/non-OPEC deal, which increased the compliance with the output cuts to 115% in November, bringing the 2017 average compliance to 91%. In particular, Brent North Sea quality opened the negotiations pricing at $63.70/b and closed at $66.62/b – that is a record high since May 2015 – while West Texas Intermediate opened at $58.36/b, closing at $60.25/b – the highest level since June 2015. At the time of writing, Brent was quoting $67.98/b and WTI $61.92/b.
On December 6th, both the European and Asian benchmark and the American blend reached their monthly low, respectively quoting $61.26/b and $55.97/b. According to the data published by the U.S. Energy Information Administration, despite a drop in U.S. crude stocks by 5,600,000 barrels, the Distillate Fuel Oil inventories piled up by 1,700,000 barrels and the Total Motor Gasoline stocks accumulated by 6,800,000 barrels with the consequence that some hedge funds sold off their positions.
The different financial and geopolitical issues that supported the bullish barrel price trend were the followings:
1.On December 11th, the North Sea Forties Pipeline System (FPS) closed due to a crack. Thanks to 80 wells, this pipe transports 450,000 b/d, about 40% of the UK’s total oil production and approximately ¼ of the entire North Sea output. FPS has been operational since December 30th;
2.On December 12th, according to the data published by the U.S. Commodity Futures Trading Commission, the hedge funds boosted their Brent net-long speculative positions to an all-time high, while the net-long positions on WTI increased by 7.3% during the week, which ended on December 26th;
3.The weakness of the dollar;
4. On December 22nd, in accordance with the data provided by EIA, U.S. crude stockpiles fell by 4,600,000 barrels to 1,900,000,000 barrels, the lowest level since July 2015;
5. On December 26th, the explosion of a pipeline in Libya decreased the production of the country by approximately 100,000 b/d. Waha, which is a joint venture between the Libyan National Oil Corp, Hess, Marathon Oil ad Conoco Phillips, operated the pipe that lead to the terminal of Al Sider in the Cyrenaica region under the control of General Khalifa Haftar.
The bullish factors mentioned above, in addition to the negative effects on U.S. refinery sector caused by Hurricanes Harvey and Nate, which hit North America at the end of August and October, brought the Brent/WTI price gap to its widest level in more than two years at the end of 2017.
On December 13th, the Federal Reserve increased its interest rates by 25 base points to 1.25/1.50%. Despite this measure, the dollar depreciated over the euro, pricing 1.1998 €/$ on December 31st probably because Trump’s Fiscal Reform "will be irrelevant over the green banknote" as Giuseppe Sersale, strategist of Anthilia Capital Partners, suggested in an interview published by Milano Finanza. At the time of writing, the €/$ exchange rate was quoting 1.2031 €/$.
After having cut its key interest rate (per annum) at the end of November, the Central Bank of Russia slashed it again by 50 base points to 7.75% on December 20th. For some analysts, this monetary policy choice was due to the slowdown of the Russian Gross Domestic Product – undepressed at +1.8% during the III quarter of 2017 – and of the November industrial production data, but for other advisors it was because of the law inflation and in particular, as the consequence of the oil agreement.
Latest data and estimates on oil & gas
According to the data published by the Oil Market Report on December 14th, global oil supply increased by 200,000 b/d in November at 97,800,000 b/d approximately, 1,100,000 b/d less in comparison with the same period in 2016. Taking into account that OPEC crude production dropped for the fourth consecutive month to 32,360,000 b/d, down 1,300,000 b/d year over year, world output increase was due to U.S. bullish production trend.
In October, OECD commercial stocks fell by 40,300,000 barrels to 2,940,000,000 barrels, their lowest level since July 2015. Currently, they are 111,000,000 barrels above the five-year average.
In 2017, global oil demand is estimated to grow by 1,500,000 b/d, while in 2018 it is forecast to raise by 1,300,000 b/d.
Based on the figures of the Drilling Productivity Report published by the Energy Information Administration on December 18th, the American unconventional output is expected to increase by 94,000 b/d to 6,408,000 b/d in January 2018.
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 9,754,000 b/d, which was reached on December 22nd 2017 (weekly forecasts). If this data is confirmed in the next months, it will be the highest level since May 1971.
According to the data provided by Baker Hughes on December 29th, the 929 current U.S. active rigs, of which 747 (80.4%) are oil rigs and 182 (19.6%) are gas rigs, were the same total number as those on December 1st, but the working crude rigs diminish by 2, while the active gas rigs increased by the same amount.
In October 2017, the U.S. crude oil imports increased to 7,611,000 b/d. They were 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).
Now, the current 2017 U.S. average crude oil imports of 7,951,200 b/d are 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.
Geopolitics of Oil & Natural Gas
In 2017, barrel prices strongly increased in comparison with 2016. In particular, Brent rose by 17.3%, while WTI by 10.3%.
What are the most important economic and geopolitical factors that may influence the oil trend in 2018 and in the next future too?
As was previously written, global oil demand is estimated to grow by 1,300,000 b/d. On the supply side, crude production from OPEC and its non-OPEC allies will remain stable, while the de-stocking process will carry on, but at an uncertain pace. U.S. Energy Information Administration forecast a tight oil output rise as a consequence of which, the market would probably maintain the current light over-supply at least during the first half of 2018.
Nevertheless, the fracking sector should still face many strong challenges with regard to, both the production and the financial costs that the current barrel prices cannot completely support. Moreover, in accordance with Adam Waterous, chief executive officer at the Calgary-based Waterous Energy Fund, “Tight rock is not going to solve the global supply-demand issue”, and the unconventional boom may not be enough to meet the increasing of the 2019 global oil demand because the industry has dramatically cut investments in higher-risk mega-projects.
Taking into account that China has become the first world crude importer since 2016 overcoming the United States of America, from a geopolitical point of view, the most important event in the new year will be the launch by the "Dragon" of the petro-yuan future convertible in gold in the International Energy Exchange of Shanghai.
Will it succeed?
At the moment, it is very difficult and too early to answer this question, but we would like to put into light two interesting issues for our readers.
Firstly, according to Xinhua net, starting from January 1st 2018, the doubling of the Russian Eastern Siberia–Pacific Ocean (ESPO) pipeline will give to China the capacity to increase its crude imports through the ESPO system, from 300,000 b/d to 600,000 b/d. This move will strengthen Russian position as the main Chinese supplier.
Secondly, according to the Petroleum Supply Monthly Report published by EIA, in October, the United States exported 1,731,000 b/d of crude. China was the biggest buyer of U.S. exports, after having overcome Canada.