Brent’s vault from the low-$50s to a two-year high just above $59/barrel in September was supported by a three-legged stool:
- Confidence in continued strong OPEC/non-OPEC efforts to curtail crude supply through 2018
- Expectations of US crude production growth starting to moderate, checked by WTI slumping below $50 and averaging around $3.60/barrel lower over April-September versus the first quarter of 2017
- Signs of strong growth in global oil consumption, which could help speed up the draining of inventories
The third leg came up short this week, and the stool wobbled, but not too much, validating our view that Brent has found a new floor around the mid-$50s.
A sudden escalation of tensions within Iraq was spurring crude higher Friday. But looking beyond the day, an overarching narrative of a rebalancing process being slowly but surely underway in the oil market has taken hold of sentiment.
We said in our Oil Viewsletter dated 6 October 2017: “There is plenty of skepticism around the most optimistic 1.6 million b/d year-on-year jump predicted by the International Energy Agency. But few in the market would be willing to bet against it until and unless the upcoming monthly consumption data squash the narrative.”
The IEA’s October oil market report released Thursday pointed to a significantly lower rate of oil demand growth in the third quarter compared with Q2, and validated our cautionary stance on extrapolating from one strong quarter. It made the market nervous and sent Brent and WTI tumbling after three straight days of gains.
However, the IEA also maintained its 1.6 million b/d annual growth projection for the full year, so the demand optimists may not be recalibrating yet.
The week brought a flood of statistics, observations and projections in monthly reports from three major agencies: the US Energy Information Administration, the Paris-based IEA and OPEC. The market had to try and reconcile them to get a coherent picture.
The three have different global demand outlooks, but are on the same page with regard to modestly downward adjustments to US output growth forecasts and observations of a slow decline in global oil inventories, albeit to levels still above the five-year average.
Geopolitical risks to supply have been a constant this year but have offered little to the oil bulls beyond short-lived price spikes at best. The latest one to rattle the oil market Friday was escalating tensions between the separatist Kurdistan Regional Government and the central government in Baghad over control of the Kirkuk oil field. The other one was uncertainty over the Iran nuclear deal if the US walks away from it in the coming months, though it does not pose an immediate threat to Iranian oil supply.
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Headline crude prices for the week beginning 11 March 2019 – Brent: US$66/b; WTI: US$56/b
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In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell