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Demostenes Floros

Demostenes Floros

Demostenes Floros, a geopolitical analyst, is a professor of the Masters’ in International Relations Italy – Russia, at the University of Bologna Alma Mater, as…

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Why Oil Prices Increased Despite Doha Disaster

Doha Meeting

In April, oil prices significantly increased by around 20 percent. In particular, Brent opened at $38.69/b and closed at $47.32/b (monthly high, $48.50/b), while WTI opened at $38.14/b and closed at $46.06/b (maximum, $46.78/b). This made April the month with the highest oil price increase in the last year. In comparison to the beginning of 2016, prices closed out the month up 80 percent. This bullish trend has steadily characterized the entire month, both before the meeting in Doha on April 17 and after the failure of the oil producer’s summit.

Simultaneously, the €/$ exchange rate closed the month around 1.14 €/$, the same price quoted at the beginning of April. The temporary recoveries at 1.12 €/$ showed by the American green bills over the European currency disappeared as a consequence of the expected maintenance of interest rates at 0.25-0.50 percent by the Federal Reserve on April 27, following a weak growth in gross domestic product during the first quarter of 2016 (+0.5 percent).

Due to the increase in oil prices, the ruble appreciated, both over the euro and the dollar respectively, moving from 77.5 ruble/€ to 73.2 ruble/€ and 67.8 ruble/$ to 64.2 ruble/$. Brent crude, which is used as a basis for the price of the country’s main export Urals blend gained 22 percent, while the Russian ruble gained only 5 percent against the U.S. dollar. Related: Iran Hits Saudis Where It Hurts, Offers Discounts On Asian Crude

Latest data and estimates on oil & gas

According to the data provided by the International Energy Agency in its Oil Market Report on April 14, global oil supplies sank by 0.3 million b/d in March to 96.1 million b/d, with annual gains shrinking to 0.2 million b/d. OPEC crude oil production fell by 90 thousand b/d in March to 32.47 million b/d. The supply from Saudi Arabia dipped in March but held close to 10.2 million b/d. The overhang of inventories in the OECD countries widened to 387 million barrels in February.

Based on the figures published by the Energy Information Administration on April 11, U.S. tight oil production is expected to decrease by 114 thousand b/d in May. The total U.S. oil output currently stands at 8.94 million b/d from its peak of 9.7 million b/d in April 2015. U.S. crude oil production averaged an estimated 9.4 million b/d in 2015. The production is forecast to average 8.6 million b/d in 2016 and 8.0 million b/d in 2017. U.S. oil output is estimated to reach 7.9 million b/d in the 3Q2017, 1.8 million b/d less in comparison with the peak (highest since 1971).

In accordance with Baker Hughes data, the number of active U.S. oilrigs decreased to 332, less than one quarter of the record reached in 2014.

Global oil demand increased from 93.58 million b/d in the 1Q2015 to 95.48 million b/d in the 1Q2016. Growth in global oil demand will ease to around 1.2 million b/d in 2016, below 2015’s 1.8 million b/d expansion.

In conclusion, there is a steady oil demand growth and a falling non-OPEC supply (except for the Russian Federation) in the market. The year by year drop of the latter was estimated at 690 thousand b/d in March and it is forecast at less than 700 thousand b/d in 2016. Even a conservative account of these figures, the surplus in the oil market will fall from 1.5 million b/d in the first half of 2016 to 0.2 million b/d in the second half of this year.

The meeting in Doha

On April 17, the talks by major oil producers to freeze output failed after Saudi Arabia, Qatar and the United Arab Emirates said they would not reach a deal unless Iran was included. In reality, Tehran said before the meeting that it wants to increase its production to pre-sanctions levels of 4 million b/d in order to be able to benefit from the lifting of economic sanctions under the nuclear deal with 6 leading world powers. For this reason, Iran did not send its Energy Minister, Bijan Namdar Zanganeh, to participate in the talks. Related: EPA Launches New Methane Rules For Oil And Gas

Despite this outcome, oil prices increased during the second half of April. What are the possible explanations of this present trend? Why was it not predicted in the report issued by the U.S. bank, Goldman Sachs?

Here are some suggestions:

1. Many oil producers – including Saudi Arabia and Russia – were still producing at their highest in January 2016 as well as during the first quarter of the current year. In addition, the second-biggest OPEC producer, Iraq, increased crude output to its highest level in the post-Saddam Hussein era from 4.46 million b/d in January to 4.55 million b/d in February. Looking deeper into the data of the first month of this year, the Russian Federation would have had to freeze its output at 10.99 million b/d, which is the record high since the collapse of the Soviet Union, if the oil producers had achieved an agreement in Qatar. At the same time, Saudi Arabia would have had to stabilize its production at 9.95 million b/d;

2. Speculative bets on oil helped push up prices. In reality, the total amount of the long net speculative positions, both over the Brent and WTI are at their record high. The sum of futures and options are equal to 656 million b/d approximately, 7 times more the daily oil global output;

3. The weakness of the dollar, which is inversely correlated with raw materials, pushed up oil;

4. Increasing demand from China is another factor for bolstering prices. In March, the country’s crude imports rose 22 percent year on year, reaching 7.7 million b/d;

5. Last, but certainly not least, some analysts pointed out that the decline in U.S. output could curb the glut in the global market. "It really doesn’t matter what OPEC does. Supply is going to come down because of a drop in U.S. production. U.S. production won’t stop falling unless we get prices around $45 or $50, and at that point it will only stabilize," Roland Morris, commodities strategist at VanEck, which manages $24.7 billion in assets, told the Wall Street Journal.

With regard to Saudi Arabia, "the weekend talks are a demonstration that the Saudi government, as the deputy crown prince has clearly stated, doesn’t want to cede market share", Ed Morse, head of global commodity research at Citigroup told Bloomberg. It seems that the Riyadh’s strategy of maintaining low prices thanks to their lower costs of production in order to overthrow high costs producers and defend their market share, is gaining more ground over tight oil producers rather than Iranian output which, on the contrary, is slightly increasing. On the other side, the Saudis must take into account the political consequences of their looming military defeat in Syria in addition with their political relationship with the United States that is currently at its lowest point in recent memory.

Iran is in the opposite situation. It appears that it is winning the war in Syria but, as we pointed out in our previous report, is unable to boost oil production without foreign investments, which need high and stable prices.


According to AP reports, after losing $390 billion in revenue due to weak crude prices in 2015, oil-exporting countries in the Middle East could lose from $490 billion to $540 billion this year compared to 2014. Countries heavily dependent on crude like Saudi Arabia will have the biggest budget deficits. Riyadh is trying to diversify its economy, but oil still accounts for 72 percent of its revenues.

This could be a good reason for both countries to try again to find a reconciliation, which probably needs the joined efforts of the Russian Federation and the United States. Related: Are Subsidies Killing US Solar Companies?

However, the two biggest nuclear world powers have their problems too. In the U.S., the dream of energy independence with the fracking technique revolution is slowly disappearing. There is a good possibility that the next President of the United States will have to implement the future political strategy of the U.S. in an energy context that will not be as favorable as during the last decade.

Simultaneously, the Russian Federation, with an oil production at full speed since the collapse of the Soviet Union, will have been relieved by the natural gas data. In 2015; Gazprom Export exported 158.6 Gmc3 of natural gas (calorific power equal to 37.38 MJ/mc) to Europe and the first 2016 figures seem to be very positive as well. However, the revenues related to natural gas are a little more than one quarter of those derived by oil and its by-products.

According to the data compiled by Bloomberg, - "the 18 nations set to gather in Doha to discuss a production freeze have spent $315 billion of their foreign - exchange reserves about 1/5 of their total - since the oil slump started in November 2014. In the last 3 months of 2015, reserves fell nearly $54 billion, the largest quarterly drop since the crisis started". A majority of this drop came from Saudi Arabia, Russia, Libya, Iraq, Azerbaijan, Nigeria, Qatar and Venezuela respectively. But Saudi Arabia’s strategy to push out high cost U.S. shale is starting to bear fruit, but will oil prices rise in time to rescue some of these struggling OPEC members?

By Demostenes Floros

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