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Demostenes Floros

Demostenes Floros

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How Volatility And Uncertainty Characterized February Oil Markets

In February, oil prices were characterized by volatility. In particular, the Brent benchmark opened at $34.9/b, reached its lowest at $31.42/b (February 9) and closed at $36.62/b, while WTI opened at around $33.14/b, touched bottom at $29.75/b (February 10), and concluded at $33.97/b.

During the first half of February, the Euro appreciated against the USD, moving from 1.08 €/$ to the maximum of 1.13 €/$ (February 11). The €/$ exchange rate trend then turned about and stabilized at 1.08 €/$ showing that, in this case, the reciprocal ratio between the dollar and the barrel did not appear.

Furthermore, the €/$ tendency reflected the possibility that the Federal Reserve revised its program of political economy, which foresaw 4 increases of the interest rates during 2016, due to the worsening of the U.S. macroeconomic situation as well explained by the Vice President of FED’s Executive Board, William Dudle. If this is the situation, I hope there won’t be a fourth program of quantitative easing because, according to data, monetarism doesn’t seem to be the magic wand that can resolve all the problems of the Western economies only with the help of a magical formula announced by a Central Bank.

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Latest data and estimates on oil & gas

According to the Oil Market Report (February 9), oil demand peaked at a five-year high of 1.6 million b/d in 2015, and is forecast to slowly increase by 1.2 million b/d in 2016. In the first quarter of 2016, demand is estimated at 94.5 million b/d. Global oil supply dropped by 0.2 million b/d to 96.5 million b/d in January, as higher OPEC output only partly offsets lower non-OPEC production.

Therefore, the current surplus of the supply over demand is approximately 2 million b/d. At present, U.S. crude production is at around 9.1 million b/d, but the unconventional oil & gas output has been decreasing in conformity with the EIA Drilling Productivity Report. According to Baker Hughes, the number of active U.S. oil rigs has been dropping to the lowest (400) since December 2009 and by less than 1/3 year to year. At the same time, American stockpiles have risen to the highest in more than eighty years.

Political and economic assessments

On February 16, the world’s two biggest crude conventional producers stated that they do not want to increase oil output. In particular, they decided to freeze their productions to January’s 2016 levels. Along with Russia and Saudi Arabia, Qatar and Venezuela have agreed to freeze their output at January levels too. According to Russia’s Energy Minister “a deal will be reached if other producers join the initiative”, while his Saudi counterpart stated “we don’t want significant gyrations in prices. We do not want a reduction in supply. We want to meet demand. We want a stable oil price”. Because of the following adherence to the Doha arrangement by Ecuador, Algeria, Nigeria, Oman, Kuwait and the United Arab Emirates, approximately 73 percent of the world oil production might be frozen. Iran and Iraq welcomed the initiative, but did not joint it.

If we look deeper, the Russian Federation will freeze its output at 10.99 million b/d, which is the record high since the collapse of the Soviet Union. Saudi Arabia will stabilize its production at 9.95 million b/d and OPEC at 32.335 million b/d, a little bit under the historic maximum of 32.426 million b/d reached two months ago.

Having said that, the limited recovery in prices from February 17 until the end of the month has to do with a technical issue too. Olivier Jakob, analyst at Petromatrix, pointed out the involuntary disruption of supplies from a pipeline in Iraqi Kurdistan that was recently pumping about 600.000 b/d, which led to a crude output fall of 280.000 b/d during the second half of the month.

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In spite of the fact that the Iranian Energy Minister, Bijan Namdar Zanganeh, called the Doha arrangement “ridiculous”, the number of countries that have joined it, makes Iran’s involvement unnecessary in obtaining the goal of freezing the oil production.

At the same time, Tehran is planning to sell 300.000 b/d to the European market, using the euro instead of the dollar. “Many European companies are rushing to Iran for business opportunities, so it makes sense to have revenue in euros”, said Robin Mills, chief executive of Dubai-based Qamar Energy.

The producers’ front to the challenge of prices

Rating agency Standard & Poor has cut Saudi Arabia’s rating by two notches from A+ to A-, saying falling crude prices continue to hit the Kingdom’s finances. On February 23, at the IHS CERA Week conference, Oil Minister Ali al-Naimi says, “The producers of these high-cost barrels [unconventional] must find a way to lower their costs, borrow cash or liquidate”. In spite of the fact that it is the first time al-Naimi has so openly talked about Saudi Arabia’s oil policy against fracking, this is not news. He possibly wanted to highlight Saudi’s disappointment over the cease-fire reached by Russia and the United States in Syria.

According to China’s General Administration of Customs, Russian oil exports to China increased by 15 percent in January, while Beijing’s crude imports from Saudi Arabia decreased at the same time. China bought 3.36 million tons of crude oil from Russia last month which is a 15 percent increase from the year before. January imports from Saudi Arabia fell to 4.23 million tons from 4.47 million tons in December.

The Russian Federation has been tackling the decrease in its revenues derived from the fall in oil prices by devaluating the rubble in the short term and increasing crude exports to China.

Furthermore, due to restrictions on borrowing from Western banks, Russian companies are turning to Chinese Banks, as demonstrated by the deal reached between Gazprom and Bank of China Limited, London Branch with an amount of €2 billion over a period of five years.

In regards the U.S. unconventional production, at the International Petroleum Week forum, the head of France’s Total, Patrick Pouyanne, said, “Since March 2015 we are witnessing a decline in oil shale output in the United States, which has been reduced by 500,000 barrels per day. We don’t know how fast it will fall but we know that two-thirds of drilling rigs is no more working there".

About one third of the world’s independent oil producers are facing bankruptcy this year, as low commodity prices have limited their access to cash and affected their ability to cut debt, according to a report from auditors Deloitte, quoted by Reuters. Among them, the second largest U.S. shale gas producer, Chesapeake, is at risk. Moreover, the interest rates on energy junk bond have surpassed 20 percent for the first time, a level that is higher than that reached during the peak of the 2008/9 crisis (17 percent) and the hedges are running out. Nationally, just 15 percent of oil and gas production is hedged in 2016, compared with 28 percent of production in the fourth quarter of 2015: “Today our goal is to survive‘, said Danny Campbell, chairman of the Permian Basin Petroleum Association.

In spite of this data and taking into account the social consequences of the oil fall, on February 21, the International Energy Agency released a medium-term report stating that U.S. tight and shale output will start growing again from 2018: “Anybody who believes that we have seen the last of rising should think again".

The Italian and the European Gas Market

According to Snam Rete Gas, after 4 years of uninterrupted contractions, Italy increased its 2015 natural gas consumptions by 5.4 Gmc3, totaling 65.4 Gmc3 (+9 percent year to year). However, this figure is still far from that reached in 2008, before the beginning of the crisis (-17.2 Gmc3, -21 percent). The highest rise registered in the thermoelectric sector – 20.2 Gmc3, +2.9 Gmc3 in comparison with 2014 (+17 percent) – because of an expansion of the electricity demand and the residential sector – 30.6 Gmc3 (+2.5 Gmc3, +9 percent y-to-y 2014) – due to a colder winter. On the contrary, the consumption of natural gas in the industrial sector, 12.4 Gmc3 in 2015, has decreased, both in comparison with 2014 (-0.4 Gmc3, -3 percent), 2013 (-0.4 Gmc3, -3 percent), and 2008, 14.2 Gmc3 (-1.8 Gmc3, -13 percent). Unfortunately, this latter data shows the negative process of the Italian deindustrialization that has been started with the current crisis, which has led the country to lose approximately 18 percent of its ma
ufacturing sector.

Related: OPEC-Russia Meeting Set For April With Or Without Iran


Snam estimated that the Italian natural gas consumption will reach 74.8 Gmc3 only in 2024. According to the numbers provided by the Italian Ministry of the Economic Development, the 2015 natural gas imports, which covered 90.6 percent of the total consumption, increased by +5.3 Gmc3, moving from 54.5 Gmc3 to 59.8 Gmc3. With regard to the origin of the imports, the Italian suppliers are (percentage calculated in term of imports):

a. The Russian Federation 49 percent;

b. Holland and Norway 17 percent;

c. Algeria 12 percent;

d. Libya 12 percent;

e. LNG 10 percent

Among the gas suppliers, only the Russian Federation have increased its exports to Italy since the beginning of the crisis. Preliminary 2016 data estimates that this trend has been carrying on. Between January 1 and 20 2016, the gas exports grew by 24.5 percent versus the same period of 2015. Furthermore, in 2016 Gazprom plans to boost its gas supplies to Turkey and the EU to 162.6 Gmc3, up from 159.4 Gmc3 in 2015 (31 percent of Europe’s natural gas consumptions) and above the record of 161.5 Gmc3 in 2013. Bloomberg cited the company’s non-public budget, which according to the agency is “more ambitious than public statements by the company to maintain supply".

In spite of all the attempts to substitute the Russian “blue gold‘, I would like to suggest to the Italian and the European politicians that diversification must become a priority in order to reduce the current dependence on the Russian Federation’s gas. That said, it may be difficult for them to diversify while maintaining current shares.

By Demostenes Floros via ABO

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