In September, oil prices significantly increased at around $4/b. In particular, Brent North Sea quality opened at $52.75/b and closed at $56.68/b, while West Texas Intermediate opened at $47.34/b and closed at $51.54/b. At the time of writing, Brent was trading at $56.06/b and WTI at $50/b. The European/Asian benchmark and the American reference reached their monthly high respectively, on September 25th – quoting at $59.24/b, a record high in the last 26 months – and on September 26th – pricing at $52.40/b, the maximum for the last two years – in the wake of the independence referendum held in the Iraq’s Kurdish region, the result of which clearly showed the will to separate from Baghdad. As a consequence of this geopolitical tension, Turkish President, Recep Tayyip Erdogan, threatened to cut off the pipeline from northern Iraq’s Kurdish autonomous region to Turkey, which pumps approximately 600,000 b/d, while Baghdad called for an international boycott of Kurdish oil sales.
In addition to this specific, but temporary issue, three factors explain the bullish trend of barrel prices. In particular:
1. Demand – According to the data provided by the International Energy Agency on September 13th, oil demand is estimated to grow by 1,600,000 b/d in 2017 (revised upward for the third month in a row), reaching 97,700,000 b/d (+1.7% y-o-y).
The OPEC Monthly Oil Market Report published on September 12th confirmed this increasing trend even if for a lower amount. In fact, 2017 world oil demand growth is forecast to rise by 1,420,000 b/d (revised upward by 50,000 b/d);
2. Stocks – Based on the data provided by the Weekly Petroleum Status Report published by the Energy Information Administration on September 22nd, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1,800,000 barrels from the previous week;
3. Exports – In accordance with the Monthly Energy Information Administration Report, OPEC oil export decreased by 1,300,000 b/d between July and August.
Looking deeper into the September oil trend, the WTI decrease seen between September 8th/12th was directly related to the consequences of the exceptional atmospheric events, which happened in the Mexican Gulf in August. In fact, Goldman Sachs analysts predicted that the combined refiner demand loss, as a result of the hurricanes would total about 900,000 b/d in September and 300,000 b/d in October, a "bearish shock for global oil balances". In the aftermath, the recovery of WTI price was slower than that of Brent, probably because the U.S. frackers, having sold their forward production (hedging), slowed down the bullish tendency. As a matter of fact, the American quality clearly overcame the threshold of $50/b after the EIA published that the U.S. oil exports reached 1,500,000 b/d. In its conclusion, the Oil Market Report put into light that "Based on recent bets made by investors, expectations are that markets are tightening and that prices will rise, albeit very modestly". On September 26th, FED Governor, Janet Yellen, in the course of the last Federal Open Market Committee expressed her concerns with regard to the overestimated calculation of U.S. inflation and unemployment rate. Therefore, there is a high probability that the increasing of U.S. interest rates – currently, between 1/1.25% – will slow down in the next few months. As Continental Resource’s chief executive, Harold Hamm, pointed out, will the North American frackers grab this opportunity or has the Energy Information Administration been overestimating 2017 U.S. crude oil production too? At the same time, Trump’s Administration should take into account that, according to the U.S. Debt Clock, the United States has accumulated $20,000,000,000,000 debt. On September 12th, the American National Debt stood at $20,160,000,000,000, $62,000 per person and over $167,000 per taxpayer. Based on the Congressional Budget Office, the Federal debt held by the public is now at its highest level since shortly after World War II. In addition, according to the figures provided by the Commerce Department on September 19th, during the 2017-second quarter, the U.S. Current Account increased to $123,100,000,000 billion, up 8.5% in comparison with the first quarter ($113,500,000,000). It was the biggest deficit since a gap of $150,000,000,000 reached in the fourth quarter of 2008.
"At the moment, there is absolutely no sign that either the Trump administration or the Congress want to seriously overhaul the entitlement programs that are the root cause of this systemic fiscal imbalance", Paolo von Schirach, President of the Global Policy Institute and professor of international affairs and economics at BAU International University in Washington, DC, stated on September 19th.
Latest data and estimates on oil & gas
According to the data provided by the Oil Market Report published by the Energy Information Administration on September 13th, global oil supply decreased in August by 720,000 b/d to 97,700,000 b/d for the first time since April due to the unplanned outages and scheduled maintenance, mainly in non-OPEC countries. In particular, OPEC crude production dropped by 210,000 b/d to 32,670,000 b/d because of the Libyan output disruption ascribable to the political turmoil in the country. As a result, the compliance of the OPEC members with the 2016 November agreement increased from 75% in July to 82% in August, while the non-OPEC rate compliance reached 100%. OECD industry stocks were quite stable in July at around 3,016,000,000 barrels, 5,000,000 less than the preceding report, but are still 190,000,000 barrels above the five-year average.
Global oil demand is estimated to grow by 1,600,000 b/d in 2017, reaching 97,700,000 b/d. Therefore, the rebalancing of the market has certainly been carrying on but, at the same time, it must be taken into account that stocks "are falling from a very great height in volume terms". Based on the figures of the Drilling Productivity Report published by the Energy Information Administration on September 18th, the American unconventional output is expected to increase by 79,000 b/d to 6,083,000 b/d in October.
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 9,561,000 b/d, which was reached on September 29th 2017. According to the data provided by Baker Hughes, the total current number of U.S. active rigs – 940 of which, 750 (79.8%) are oil rigs and 189 (20.1%) are gas rigs plus 1 miscellaneous (0.1%), on September 29th – were unchanged in comparison with the data published on August 25th. In July 2017, the U.S. crude oil imports decreased at 7,825,000 b/d. They were 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 8,050,000 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
On March 15th 2016, Ambassador Dan Fried, Coordinator for Sanctions Policy at the U.S. Department of State, said, "The US sanctions against Russia have been more effective thanks to the low global price of oil". Taking into account that sanctions are still in place, what is the current macroeconomic situation of the Russian Federation?
Following, the most important data:
1 .GDP – The 2017 Gross Domestic Product is estimated to grow between 1.7%/2.2% thanks to investment and consumer demand. Trade, mining, and transport made a major contribution to the accelerating economic growth;
2. Inflation – The Russian government put the 2017 inflation target at 4% from the 7.1% reached in 2016. In August, inflation was at 3.3% and, at the beginning of September, at 3.2%;
3. Interest rates – On September 15th, the Russian Central Bank cut its interest rates (annual rate) from 9% to 8.5%. In December 2014, they were at 17%. Since then, the rouble, which overcame the level of 90 over the euro and of 80 towards the dollar in January 2016, has been appreciating over the major international currencies. In fact, at the time of writing, the Russian currency was pricing 67.46 rouble/€ and 57.38 rouble/$;
4. Budget deficit – The 2017 Budget Federal deficit is forecast to be at 2.1% of GDP from the previous evaluation at 3.2%.
Taking into account that – during the first 7 months of 2017 – Russian oil revenues increased by 35% in comparison with the same period of 2016 when the barrel quoted at around $27/b, it could be imagine that the current deficit improving is just the result of energy prices stabilization. This is not completely true.
1. Net Energy Budget deficit – The 2017 Budget deficit energy-deducted is estimated at 8.4% of GDP, decreasing by 0.6%. Moreover, this data is probably underestimated, because it was calculated with a GDP at 1% and an inflation at 5%.
Between 2011/14, oil & gas revenues weighed for 50% of the State budget. In 2016, it was 38%, while in 2017 it is forecast at 36%. Despite the U.S. and EU sanctions, these data suggested that the Russian Federation has been stabilizing its macroeconomic situation, which is now less dependent from oil & gas, and the economic recovery seems to be on the right path. It was not by chance that, on September 25th, the Fitch credit Agency upgraded Russia’s sovereign credit rating from "stable" to "positive", issuing the following statement:
"Russia continues to make progress in strengthening its policy framework underpinned by a more flexible exchange rate, strong commitment to inflation targeting and a prudent fiscal strategy, reflected in the recently approved budget rule. This policy mix will result in improved macroeconomic stability and, together with robust external and fiscal balance sheets, increases the economy’s resilience to shocks".