According to the data published by the Energy Information Administration on September 30th, U.S. oil production decreased for the third month in a row. In particular, it diminished from 12,123,000 b/d in April 2019 to 11,806,000 b/d in July 2019 (-317,000 b/d).
This shrinkage was due to climatic conditions (hurricane Berry) that hit the Mexican Gulf in July. However, the Energy Information Administration anticipated on October 9th that the U.S. oil production will return to grow month on month throughout the rest of this year.
In order to understand the matter at hand, it must be highlighted that fears have been clearly emerging with regard to the productive and the financial U.S. fracking system. To be more precise, productivity gains decreased from 15% in 2018 to 2% in the first half of 2019 owing to geological issues. Furthermore, during the II quarter of 2019, 11 out of the main 29 companies operating in the fracking sector produced positive cash flows, while the amount of energy bonds that will expire before 2022 reached $146 billion.
Geopolitics of oil and gas
Till today, it is still unclear which scenarios will prevail. In particular, will the current estimates, which indicate a further growth in U.S. oil and gas production, be confirmed or will the output stabilize? Instead, if the negative scenario prevails, how would it affect the international oil market (supply side)? Which will be the main geopolitical consequences?
From 1971 to 2008, U.S. oil production constantly decreased, while natural gas output remained steady. During the Barack Obama presidency, thanks to the fracking technique, the production of both fossil fuels literally boomed. As a consequence, U.S. crude imports lowered by 4,000,000 b/d (-6,000,000 b/d oil imports), while US’ energy dependency rate, which is the import of energy raw materials in relation to primary energy consumptions, reduced from 20% in 2011 to 8.3% in 2018. In the worse case scenario, U.S. energy dependence rate trend could reverse.
From a geopolitical point of view, should be pointed out that, during the last decade, the increasing of U.S. tight oil production substituted Saudi’s and Nigeria’s oil exports to the United States. Especially, the African country decreased its revenues too, because it did not find alternative purchasers. This is due to the fact that the two OPEC members produce the same U.S. light crude quality oil, characterized by a low sulphur content. If the worse come to worst, the United States of America could be forced to revise their foreign policy in the Middle East.
With regard to the U.S. energy sector, the following issues have to be highlighted:
1. In the medium term, a drop in oil production would have a bullish effect over barrel prices (ceteris paribus);
2. During the period 2019-2022, the capital concentration and centralization process that is currently being put into place in the North American fracking system will be progressively strengthened even more;
3. Over the last three years, new conventional oilfield discoveries reached their lowest level in seventy years.
How are things going between Washington and Beijing?
Between October 10th and 11th, U.S.-China commercial talks resumed. The two super powers reached a first compromise that economist Pasquale Cicalese defined as “an agreement in order to gain time”.
To be more precise, the White House sat at the negotiating table aware that the ISM manufacturing index released by the Institute for Supply Management dropped to 47.8% in September, the worst contraction since the biennium 2007-2009, after the already negative 49.1% statistics registered in August, the lowest level since 2016. The failure of the previous Sino-American talks had led to the imposition of 25% Chinese duties on U.S. Liquefied Natural Gas imports. As a consequence, in 2019, the number of American methane-tankers arriving in the South-East China coast literally fell in comparison with 2018.
If in 2018, a percentage of the total crude Chinese imports (7,960,000 b/d, +10% in comparison with 2017) of U.S. crude was equal to 2.9%, during the first 7 month of the current year, this percentage decreased to 1.3% (248,000 b/d, -64%), although no duties were applied to the oil.
Italy that is currently being stretched between NATO alliance and the important, but debated deal concerning the Belt and Road Initiative reached with China last March 23rd, concerning the Belt and Road Initiative, should pay great attention to the evolution of the international energy market and the Sino-American talks too in the wake of the suggestion advised by ambassador Giampiero Massolo, former Foreign Affairs Secretary General and current Ispi’s and Fincantieri’s President: “[In order to count in the global chessboard] Italy must realize that the traditionally “protective umbrellas” – as the European Union, NATO and the United Nations – can no longer replace the ability to quickly decide and take responsibility on its own in the international arena”. With regard to the ownership of Italy’s strategic infrastructures, a similar thinking was expressed by Gianandrea Gaiani. “Neither to the Chinese, nor to other foreigners” stated the Director of Analisi e Difesa on October 7th, criticizing the pressures exerted by U.S Secretary of State, Mike Pompeo, over the Italian government.
It will not be superfluous to recall that 11 years after the 2008 crisis and so many financial manoeuvres dictated by the EU, Italy’s GDP (Gross Domestic Product) has been reduced by 4% in real terms. Guido Salerno Aletta, leader writer of Teleborsa agency, reminds us that only Greece has done worse with almost minus 25%.
Latest data and estimates on oil & gas
Thanks to the figures provided by the Oil Market Report, published in the International Energy Agency on September 12th 2019, global demand fell by 200,000 b/d in June, the third annual fall occurred in 2019.
In August, post-hurricane supply rebounded in the United States, raising global production by 530,000 b/d to 100,700,000 b/d. IEA confirmed its global growth estimates for 2019 and 2020 by 100,000 b/d and 50,000 b/d, to 1,100,000 b/d and 1,300,000 b/d, respectively. OECD commercial stocks rose by 1,500,000 barrels in July 2019 (month over month) to a total of 2,931,000,000 barrels and stood 19,700,000 barrels above the five-year average.
Based on the Drilling Productivity Report figures issued by the Energy Information Administration on September 16th 2019, the American unconventional crude output is estimated to increase by 74,000 b/d to 8,843,000 b/d in October 2019.
The U.S. crude production, after the former 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 the estimated record of 12,600,000 b/d, which was reached on October 4th 2019 (weekly forecasts).
Thanks to the statistics provided by Baker Hughes on October 11th 2019, the 856 current U.S. active rigs, of which 712 (83.2%) are oilrigs and 143 (16.7%) are gas rigs, plus 1 miscellaneous (0.1%), were 42 less than September 6th 2019, the lowest level since January 20th 2017.
According to Bloomberg, Permian producers have been continuing to drill in an entirely unsustainable manner: “oil producers drilling so-called parent-child wells in the Permian Basin are risking the loss of 15% to 20% of the crude that can ultimately be recovered from those wells by spacing them too close together”. […]. “In much of the Permian”, added Bloomberg, “the amount of oil that can be recovered from child wells is on average about 20% to 30% lower than that of the parent, the analysis shows. That means overall production from a particular area could be some 15% to 20% lower than projections made by producers”.
In July, U.S. crude oil imports diminished by 206,000 b/d to 6,935,000 b/d. They were 7,141,000 in June, 7,158,000 in May, 7,025,000 b/d in April 2019, 6,759,000 b/d in March 2019, 6,652,000 b/d in February 2019 and 7,520,000 b/d in January 2019. The 2019 U.S. crude oil imports average stands at 7,027,000 b/d, on the fall in comparison with 7,757,000 b/d in 2018 and 7,969,000 b/d in 2017.
Based on the data provided by the Energy Information Administration on October 2nd, U.S. crude oil exports boomed by nearly 1,000,000 b/d in the first half of 2019 in comparison with the same period of 2018, reaching an average of 2,900,000 b/d.
Oil and currency trends
In September 2019, Brent North Sea quality opened the quotations at $58.65/b and closed at $60.78/b, while West Texas Intermediate grade started the listings at $54.65/b, closing at $54.30/b.
As a direct consequence of the military drone attacks, which occurred on September 14th, both the European-Asian benchmark and the American blend reached their monthly high, respectively pricing $69.18/b on September 17th and $63.07/b on September 16th. In particular, drone strikes hit the Khurais field and the Abqaiq plant lowering Saudi’s production by 5,700,000 b/d. Moreover, U.S. commercial stocks decreased by 6,912,000 barrels from August 30th to September 6th.
In the second half of the month, barrel prices decreased due to the following factors:
1. In accordance to Reuters, Saudi Aramco, which is the State-owned oil company, restored its pre level attacks output capacity to 11,300,000 b/d on September 25th. However, that news was not confirmed by the Wall Street Journal. Instead, it was confirmed that the repairs at the Khurais field and the Abqaiq processing facility may take several months and not weeks;
2. U.S. inventories increased from 416,068,000 barrels on September 6th to 419,538,000 barrels (+3,470,000 barrels) on September 20th, instead of a predicted decline of 6,500,000 barrels;
3. Despite the United States of America accusing Iran of being the perpetrator of the attacks towards Saudi Arabia, Washington did not respond to Teheran with a direct retaliation (war). Meanwhile, Iran announced on September 23rd that the British-flagged oil tanker Stena Impero, which was previously seized, was released;
4. On September 27th, Saudi Arabia agreed to a partial ceasefire against the Houthi fighters in Yemen.
In the short term, the barrel price trend will depend on the implementation of the U.S.-China deal. Actually, the commercial dispute between the two super powers is the key factor that is affecting global economy and oil demand too. At the time of writing (October 14th), Brent was trading at $59.99/b, while WTI at $54.23/b.