ENERGY INTERNATIONAL RISK ASSESSMENT (EIRA)
AN INDEPENDENT MONTHLY REVIEW
November 2017
VOLUME 4
ISSUE 11
 
The race to restabilze the markets

On May 4th, both the European and Asian benchmark and the American reference reached their monthly lowest, respectively pricing $48.26/b and $45.76/b in particular, due to two reasons:

-Firstly, the Energy Information Administration stated that the U.S. crude stocks only decreased by 930,000 barrels during the last week of April. Moreover, gasoline stocks increased by 191,000 barrels, overcoming by 10% the annual average level marked during the last decade.

-Secondly, the net long speculative positions (purchase) dropped by 15% during the week ended on May 2nd, because the hedge funds decided to cash their revenues.

Barrel prices then significantly increased at around 10%, reaching their monthly high on May 23rd with Brent crude pricing at $54.19/b and WTI quoting at $51.47/b, because of the following reasons:

-During the first week of May, the U.S. crude stocks strongly dropped by 5,200,000 barrels. At the same time, gasoline inventories decreased by 150,000 barrels, while distillate products fell by 1,600,000 barrels. Despite this bearish stock trend, U.S. oil inventories still surpass the average season amount of the last five years by approximately 100,000,000 barrels.

-In accordance with the Russian Federation, the OPEC producers announced the decision to roll over the 2016 November agreement before the meeting scheduled on May 25th. “We’ve come to the conclusion that the agreement needs to be extended‘, said the Saudi Energy Minister Khalid al-Falih together with his Russian counterpart, Aleksandr Novak, attending a joint briefing in Beijing, in China, on May 15th. “The two ministers agreed to do whatever it takes to achieve the desired goal of stabilizing the market and reducing commercial oil inventories to their 5-year average level‘.

Real, on May 25th, the Organization of the Petroleum Exporting Countries inked the deal with the Russian Federation and other major producers to extend the output cuts (1.800.000) by nine months, until March 31st, 2018. In the wake of this announced decision, barrel prices dropped probably because the investors expected a bigger cut thus, they paid off one part of their bullish bet positions.

In May, the €/$ exchange rate opened at 1.0898 €/$ and closed at 1.1221 €/$. After having reached its monthly lowest over the green banknote at 1.0860 €/$ on May 11th, the European currency reached its maximum in six months over the American currency, pricing 1.1243 €/$ on May 22nd in the wake of a political turmoil characterized by the firing of James Comey, the Director of the FBI, by the U.S. Ministry of Justice.

Simultaneously, the rouble/$ exchange rate opened at 56.87 rouble/$ and closed at 56.77 rouble/$. The reaching of the oil agreement will help the Russian Federation to achieve a lower inflation target and a smaller deficit budget. According to the Russian Economy Minister, Maksim Oreshkin, inflation may slow below the year-end forecast of 3.8%, while the deficit could shrink to below 2% of GDP from the initially targeted 3.2%.

 

Latest data and estimates on oil & gas

 

According to the Oil Market Report, published by the International Energy Agency on May 16th, world oil supply decreased by 140,000 b/d in April at around 96,170,000 b/d due to the fall in non-OPEC output, especially in Canada.

OPEC crude output increased by 65,000 b/d to 31,780,000 b/d as higher production from Nigeria and Saudi Arabia more than offset lower flows from Iran and Libya. At the beginning of May, the Libyan extractions have actually been restarting to raise in the oilfields of El Feel, Sharara and Wafa, bringing the total output close to 800,000 b/d. However, this data complies with the November’s 2016 agreement by 96%. In particular, on May 1st, the production of the Russian Federation fell by 300,790 b/d in comparison with the record levels of 11,200,000 b/d reached in October 2016. This cut is clearly higher than the 300,000 b/d promised the previous autumn by Russia to the OPEC Members.

In accordance with the same Report, global demand growth is forecast to rise by 1,300,000 b/d in 2017, reaching 97,900,000 b/d.

Moreover, IEA confirms, “that re-balancing is essentially here and, in the short term at least, is accelerating‘.

Based on the figures of the Drilling Productivity Report, published by the Energy Information Administration on May 15th, the American unconventional output is expected to increase by 122,000 b/d to 5,401,000 b/d in June. 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 9,342,000 b/d, which was reached on May 26th2017.

In fact, according to the data provided by Baker Hughes, the total current number of U.S. rigs – 916 of which, 733 (80%) are oil rigs and 182 (19.9%) are gas rigs, plus 1 miscellaneous on June 2nd – have been carrying on to rise again thanks to the increase in oil prices (y-o-y) and to the technological improvements of the sector.

In March 2017, the U.S. crude oil imports increased at 8,048,000 b/d. They were 7,890,000 b/d in February and 8,435,000 b/d in January (record since August 2012). Now, the current 2017 average crude oil imports of 8,124,000 b/d is 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.

These data have to be compared with the record high of 1,300,000 b/d reached by U.S. exports in the course of the last week of May.

In addition, according to the General Customs Administration, in April, Chinese imports decreased by 8.8% in comparison with the record high of 9,170,000 b/d reached in March. Despite this bearish trend, with 8,800,000 b/d, they did however overtake the U.S. crude imports.

 

During the first week of May, the U.S. crude stocks strongly dropped by 5,200,000 barrels. At the same time, gasoline inventories decreased by 150,000 barrels, while distillate products fell by 1,600,000 barrels. Despite this bearish stock trend, U.S. oil inventories still surpass the average season amount of the last five years by approximately 100,000,000 barrels.

Geopolitics of Oil & Natural Gas

 

In the wake of the G7 in Taormina, German Chancellor, Angela Merkel, said that “The times in which we could completely rely on others are, in a way, over. I have experienced this in the last few days. Now, I can only say that we Europeans need to take our destiny in our own hands, obviously in friendship with the United States, with Great Britain and maintaining the best possible relations with our neighbors, even with Russia. But we must realize the obligation to fight alone for our future, for our destiny as Europeans‘.

In an international arena in which the Atlantic unity is weakening and the relationship between the U.S. led by Donald Trump and the European Union headed by Angela Merkel is failing, what is the political role that Italy could play?

Perhaps, the analysis of the most important geopolitical events that happened during the month of May could help us to find an answer:

-With regard to the relationship between Italy and China, on May 12th, after the presentation of the Chinese strategic project “One Belt, One Road‘, the Italian Prime Minister, Paolo Gentiloni, stated: “I was impressed with Xi Jinping’s confidence in the future of the EU, in the relationship between China and the EU as a necessary pillar of global stability, and I was struck by the recognition of a role that defines Italy’s equilibrium on a global scale, partly with a view to future events, primarily that of G7‘.

-With regard to the relationship between Italy and the Russian Federation, after the Memorandum of Understanding signed by ENI and Gazprom on March 21st, in the presence of Vladimir Putin and Paolo Gentiloni, Rosneft CEO, Igor Sechin, and ENI CEO, Claudio Descalzi, signed a Cooperation Agreement. The cooperation between the two companies in Russia and abroad will deal within the exploration & production, refining, trading, logistics and marketing, petrochemicals and technology and innovation sectors.

-As regards to the relationship between China and the United States, the two countries reached an agreement according to which China will increase its imports of U.S. liquefied natural gas and meat. China will also open its domestic market to the U.S. financial services. At the same time, the United States will open their internal market to the Chinese chicken meat, promoting the entrance of the Chinese banks into the U.S. bank system. The U.S. Secretary of Commerce, Wilbur Ross, defined the arrangement “a herculean achievement reached in record time compared with other trade agreements that normally take place after several years, not several days‘.

-Last, but not least, the relationship between the Russian Federation and the United States of America. It seems that the Trump-Lavrov meeting, happened in the White House, on May 11th, with the mediation of Henry Kissinger, may have reached an agreement dealing with the Syrian crisis. This optimistic view was supported by UN envoi, Staffan de Mistura, too.

If the Italian elites want to face this challenge, they have to take into account the words expressed by Marcello Foa, Director of the Swiss Editorial Group Corriere del Ticino-Media, who said “it is not strange that an extremely cautious Chancellor like Merkel suddenly finds the courage to say‘: “is it impossible to trust the U.S. now‘? “Even Europe, in its strategy aimed at dropping U.S. President Donald Trump: this is why German Chancellor Angela Merkel is so bold. […..]. The suspicion is that such boldness (Merkel’s statements) is calculated and instrumental. When, in the United States, they (the anti-Trump U.S. elites) reconquer the White House, the EU will go back to being consensual and the bold Merkel will go back to being pragmatically meek.‘

To conclude, the 4 billion $ agreement reached during the St. Petersburg International Economic Forum on June 2nd, between the Italian Maire Tecnimont – in consortium with the Chinese Sinopec – and the Russian Gazprom is a good example of how to implement our strategy. The project will deal with the gas treatment in the Amur region, in the Russian Far East, near the Chinese-Russian border.

The Italian State Investment Fund – Cassa Depositi e Prestiti – will be involved in the project.

 

On May 25, the Organization of the Petroleum Exporting Countries inked the deal with the Russian Federation and other major producers to extend the output cuts (1.800.000) by nine months.