November 2016
ABO | Oil, down and up
In March, oil prices decreased. In particular, Brent North Sea quality opened at $56.28/b and closed at $52.74/b, while West Texas Intermediate opened at $53.68/b and closed at $50.65/b. Both the European and Asian benchmark and the American reference reached their lowest on March 23rd, respectively pricing $50.60/b and $47.63/b – approximately, as on November 30th – because of the U.S. crude inventories record high level, calculated at 533.1 million barrels . In addition, during the first part of the month, finance sparked a temporary drop in prices. In fact, the hedge funds, after having amassed an amount of net-long speculative positions equivalent to 951 million barrels on February 21st (10 times the world consumptions), started to cash their revenues, reducing the long-short ratio from 10.3:1 to 4.41:1 (equivalent to 422 million barrels). Instead, the increase in prices that took place at the end of March dealt with the Libyan output, which decreased by 252thousand b/d at the western fields of Sharara and Wafa due to the war between armed factions. On March 15th, the Federal Reserve rose its interest rates by 25 basis points to a range of 0.75-1% . It is interesting to put into light that, neither the yield related to the U.S. 10-Year Treasury bond, nor the dollar over the euro, strengthened during the second half of the month. Indeed, on March 13th, the Treasury bond reached its highest since July 4th 2014 at 2.6258%. Then, it decreased, closing the month at 2.3874%. Moreover, the dollar, after having quoted at 1.0533 €/$ on March the 1st, reached its monthly minimum over the euro at 1.0889 €/$, before closing the month at 1.0666 €/$, in the wake of a G20 summit dominated by the Trump administration’s protectionism. What are the reasons of these unusual trends? Certainly, the market – that was waiting the implementation of a strengthening monetary policy by Federal Reserve – discounted it during the first part of March. However, FED Chairwoman, Janet L. Yellen, said at a news conference that the American Central Bank did not share the optimism of stock market investors and some business executives that economic growth is gaining speed: "The data have not notably strengthened. We have not changed the outlook. We think we’re moving on the same course we’ve been on" . Therefore, the Federal Reserve announced no more than four, but three bullish interventions over its interest rates during the current year and in particular, decided an amount for the first of these rises, 25 basis points, which was modest in comparison with that expected by investors. These are the reasons that explain the light decreasing of the U.S. 10-year Treasury debt yield and the depreciation of the green banknote over the European currency after the FED intervention. Moreover, the dollar also depreciated over the rubble. Despite the fact that the Central Bank of Russia cut the interest rates from 10% to 9.75% on March 24th, the Russian currency has hit on March 31st its highest over the green banknote at 55.86 rubble/$ for one year due to the so-called carry trade . According to this strategy, the investors borrow at a low interest rate, usually in the developed economies and re-invest in an asset that provides a higher rate of return like emerging markets. Last, but not least, on February, the Russian Central Bank carried on the purchasing of gold, buying 9.3 t, 72 t. more than last November .


Latest data and estimates on oil & gas

According to the data provided by the Oil Market Report published by the International Energy Agency on March 15th, global oil supplies grew by 260 thousand b/d in February – reaching 96.52 million b/d – as, both OPEC and non-OPEC producers, pumped more. In particular, OPEC crude production increased by 170 thousand b/d to 32 million b/d, however hovering at around 90% in compliance with November’s agreement cuts. After having fallen by 120 million barrels from August 2016 to December 2016, in January, OECD commercial inventories rose by 48 million barrels, to 3.030 billion barrels. Preliminary data for February suggests that they have fallen back again, but only modestly. Based on the same Report, in 2016, global oil demand rose by 1.6 million b/d, but it is expected to slowdown during 2017, increasing by 1.4 million b/d, which is, in any way, more than the average growth of 1.2 million b/d that we have registered since 2000. In accordance with the figures published by the Energy Information Administration on March 13th, the American unconventional output is expected to increase by 109 thousand b/d in April 2017 to 4.962 million b/d. The U.S. crude production, after the peak of 9.7 million b/d gained in April 2015, decreased to its lowest of 8.428 million b/d on July 1st 2016 . It then started increasing to 9.147 million b/d, which was reached on March 24th 2017 . In fact, according to the data provided by Baker Hughes , the total current number of U.S. rigs – 824 of which, 662 (80.3%) of oil rigs and 160 (19.4%) of gas rigs, plus 2 miscellaneous on March 31th – 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. Now, it seems that the frackers can endure the increasing of costs despite less productive wells being brought into use and with a higher break-even price. However, it is still not clear if they will have the capacity to hold it for the entire 2017. In fact, as pointed out by Halliburton CEO, Dave Lesar, “Based on current customer demand, we are deploying nearly double the pressure pumping equipment than we originally anticipated reactivating for the entire year and we are bringing that reactivated equipment out in the first six months of the year, instead of over the course of the year‘. […..]. “We are adding nearly 30% more equipment to meet increased demand in the first half of the year. This, of course, will also temporarily increase our cost‘ . Moreover, there is a second issue related to finance and in particular, with the investment placement. In fact, on March 1st, the yield gap between the U.S. High Yield bonds and the U.S. Treasury bonds reached its lowest since July 2014 – at 3.57% – before lightly widening again under 4% that is, however, less than the half peaked in February 2016. On January 2017, the U.S. crude oil imports has strongly increased at 8.435 million b/d , the highest level since August 2012. The American average crude oil imports was 7.877 million b/d during 2016, on the rise if compared with the 7.344 million b/d imported in 2014 and 7.363 million b/d in 2015. With regard to the rebalancing trend of the market, there is a concrete possibility that the rise in the U.S. tight oil output in addition to the new level of the U.S. stockpiles may lead to an OPEC deal extension over the first half of 2017 . At the same time, it is important to underline that the increase in crude stores is the consequence of the barrels extracted by OPEC before the November agreement that are reaching the market nowadays. Therefore, the turning point in the oil market is that pointed out on November 30th by Keith Boyfield, research fellow at the Center for Policies Studies, which is “how far is this agreement going to be implemented‘ .

Geopolitics of Oil & Natural Gas

On March 9th 2017, the Italian company ENI sold to the American company ExxonMobil a 25% stake of the offshore Area 4 (exploration), in Mozambique, for an amount of approximately $2.8 billion . Four years ago, on March 13th 2013, “the dog with 6 legs‘ sold to the Chinese state own company CNPC a 20% stake of the same Area 4, for an amount of $4.210 billion . The current stake composition of the joint venture Area 4 is: ENI 25%, ExxonMobil 25%, CNPC 20%, Empresa Nacional de Hidrocarbonetos de Mocambique (ENH) 10%, Kogas 10% e Galp 10%. On December 12th 2016, ENI sold a 30% stake to Rosneft in the Shorouk gas field for $1.57 billion . Shorouk is located in the Egyptian offshore specifically, in the super-giant gas field Zohr discovered by the Italian major in 2015. Then, on February 13th 2017, ENI sold a 10% stake of the same gas field to the British company BP . Claudio Descalzi, ENI A.D., summarized the political meaning of those agreements with the following words: “At a moment in which everyone is selling production assets, we sold exploratory assets which have been recognized as unique in their potential. And we sold them to the 4 largest oil companies in the world: the first two independent companies - the American ExxonMobil and the British BP – and the first two national companies the Chinese Cnpc and the Russian Rsoneft. If we look at the from a geopolitical standpoint , the value of the companies in play and the national interest, this is a huge step for Italy […..]. It is positive one for Eni, chosen as a long-term partner, and a positive one for Italy: we have unified states that chose carefully the countries with which they conduct businesses‘. This is another important step towards the implementation of the so-called Oil Pax , thanks to which, Italy may play a pivoted role in terms of stabilization, development and political balance not only inside the Mediterranean area, but also between the three nuclear super powers. However, if the Italian elites really want to achieve this goal – that is, in prospect, the dawn of a new G4 – they must pursue it with strength. For this reason, it could be suggested to carry out with concrete political actions to the statements made by the Italian Foreign Minister, Angelino Alfano, during the Atlantic Council, in Washington, on March 23rd: "it is clear and evident that our apporach and the sanctions on Russia are neither automatic nor the end, because these are in fact the means to reach an agreement on the Ukraine because, being that they are not an instruments, they cannot be automatically renewed. So, my hope is that everything that we consider unripe for the spring of 2017 might be ripe by next year and therefore this might the final G7 and we may be able to start again with the G8"

Oil to acquire Chinese and Hindi accents

The latest World Oil Outlook (WOO) report authored by OPEC analysts could be dismissed as a self-serving pacifier based on wishful thinking. And yet, the cautious assumptions projected into the distant future seem to bear some semblance to a solid prediction of the inevitable surge in oil demand and, subsequently, of the prices.

Saudi Arabia is racing against time

A new Finance Minister was designated in Saudi Arabia. Mohammed Al-Jadaan replaced Ibrahim Al-Assaf who was running that department for the last two decades. The new financial chief of the Kingdom is not a neophyte: since January 2015, he was the Chairman of the Capital Market Authority, or CMA, equal to a minister by rank, and before he was pursuing a lawyer’s career as partner in a law firm, Al-Jadaan & Partners.

Iran and India probe ground for a long-term tango

The blatantly tough, ultimatum-style huge pressure exerted by Iran on India in the case of untapping Farzad B gas field seems to have paid off. Indian energy major, Oil and Natural Gas Corporation (ONGC) pledged to offer an acceptablefinancial investment model for the development of the field in order not to alienate the Iranians who looked like losing patience and temper with its peers.