Stakeholders and observers in the oil markets are typically well-versed with the fundamental and geopolitical metrics that impact benchmark price movements. They know where and when to look for the usual data, news and sentiment triggers. However, every once in a while, forces outside this ecosystem take control. This month has been one of them.
Crude markets were sucked into a financial vortex February 2 and their volatile price swings — mostly downward — had largely decoupled from oil market fundamentals, we wrote in last week’s Viewsletter.
This week, oil bounced up from two-month lows as global stock markets clawed back some of their massive losses. There was a flurry of keenly-watched OECD stocks data and projections on 2018 supply-demand fundamentals in the monthly OPEC and International Energy Agency reports this week. Those were no doubt factored in by the oil market, but half-heartedly, as it remained preoccupied with the goings-on in the financial world.
The February reports of the US Energy Information Administration, OPEC and the IEA brought into sharp relief two key influencers: 1) Continuing confidence in 2018 strong global oil demand growth, albeit to varying degrees and 2) Expectations of a resurgence in US shale this year driving the country’s oil production growth to a far greater extent than in 2017.
These two issues are likely to shape the debate on oil market rebalancing in the coming weeks but only after the financial markets pandemonium has subsided and crude reconnected with its fundamentals.
OPEC leaders and Russia did their bit to try and counter the growing chatter around US shale potentially neutralising the OPEC/non-OPEC production cuts aimed at rebalancing the global oil markets.
Saudi Arabia, the group’s largest producer and exporter, on February 14 said it will keep its March exports below 7 million b/d despite a scheduled turnaround at its 400,000 b/d Samref refinery in Yanbu.
Saudi energy minister Khalid al-Falih told an industry symposium in Riyadh the same day: “I am confident that our high degree of cooperation and coordination will continue and bring the desired result.”
OPEC secretary-general Mohammad Barkindo, speaking at the same event, reiterated that world oil demand was growing at healthy levels.
Russian energy minister Alexander Novak told Platts in an interview in Moscow February 13 that his country wants to build a long-term relationship with Saudi Arabia and the broad OPEC alliance beyond the current output restraint deal.
Meanwhile, the Russian sovereign wealth fund is said to have pledged to set up a major pool of investors for the upcoming initial public offering of Saudi Aramco. The deepening of Saudi-Russia economic ties offers another layer of reassurance to the market on the de-facto leaders of the OPEC/non-OPEC alliance managing their output cuts to the finish line.
That finish line — drawing down OECD oil stocks to their five-year average levels — was 52 million barrels away at the end of December according to the IEA, and about twice that, according to OPEC. The disparity aside, there is broad agreement that world oil stocks declined in 2017 after consistently rising for the three previous years.
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The amount of natural gas held in storage in 2019 went from a relatively low value of 1,155 billion cubic feet (Bcf) at the beginning of April to 3,724 Bcf at the end of October because of near-record injection activity during the natural gas injection, or refill, season (April 1–October 31). Inventories as of October 31 were 37 Bcf higher than the previous five-year end-of-October average, according to interpolated values in the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report.
Although the end of the natural gas storage injection season is traditionally defined as October 31, injections often occur in November. Working natural gas stocks ended the previous heating season at 1,155 Bcf on March 31, 2019—the second-lowest level for that time of year since 2004. The 2019 injection season included several weeks with relatively high injections: weekly changes exceeded 100 Bcf nine times in 2019. Certain weeks in April, June, and September were the highest weekly net injections in those months since at least 2010.
Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report
From April 1 through October 31, 2019, more than 2,569 Bcf of natural gas was placed into storage in the Lower 48 states. This volume was the second-highest net injected volume for the injection season, falling short of the record 2,727 Bcf injected during the 2014 injection season. In 2014, a particularly cold winter left natural gas inventories in the Lower 48 states at 837 Bcf—the lowest level for that time of year since 2003.
Headline crude prices for the week beginning 4 November 2019 – Brent: US$62/b; WTI: US$56/b
Headlines of the week
South Sudan was officially recognized as an independent nation state in July 2011 following a referendum held in January 2011. The South Sudanese voted overwhelmingly in favor of secession, which led to Sudan losing 75% of its oil reserves to South Sudan. Although South Sudan now controls a substantial number of the oil–producing fields, it is dependent on Sudan for transporting oil through its pipelines for processing and export. The transit and processing fees South Sudan must pay to Sudan to transport its crude oil are an important revenue stream for Sudan.
After an agreement was reached on the transit dispute that led to a temporary shutdown of crude oil production, the governments of Sudan and South Sudan shifted their focus from border conflicts to the mitigation of their respective domestic opposition factions. The domestic political dynamics and the security situations in both countries will continue to be a potential risk for disrupting the countries’ oil supplies and exports.
In Sudan, the economic shock of the secession has had a significant effect on the economy, which has been hurt by economic mismanagement, corruption, and unsustainably high levels of spending on the military. The partial lifting of U.S. sanctions on Sudan in October 2017 has allowed for increased foreign investment, but Sudan has made little progress toward developing the upstream sector. In August 2019, Sudan’s military and civilian leaders signed a power-sharing deal that paved the way for a transitional government led by Abdalla Hamdok, an economist, to take power in the hope this government would address the country’s problems. However, Sudan remains on the U.S. government’s list of state sponsors of terrorism, which prevents the country from receiving debt relief through the World Bank-International Monetary Fund’s Heavily Indebted Poor Countries Initiative (HIPC).
In South Sudan, President Salva Kiir and the leader of the main opposition faction, Riek Machar, reached a peace agreement in September 2018, which led to reduced violence from the civil war in South Sudan. Although the peace agreement indicates progress, whether the agreement will bring prolonged stability and an inclusive and stable form of governance is unclear. The current agreement is similar to the previous one, which was signed in 2016 and collapsed after two months, and the current iteration does not address crucial elements such as power sharing between the factions and security arrangements that would allow Machar to safely return from exile. Without significant progress in improving the security and political environment, South Sudan’s ability to attract investors and restart production at its fields to increase production will be limited.
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