Crude ended the week on a high note — with Brent closing above $67/ barrel and WTI above $63 — as sentiment in the global financial markets continued to recover from a fresh jolt Wednesday. US stocks gained the most at Friday’s market close after equities in Europe and Asia made modest recoveries. However, stocks remain vulnerable to volatility and more sell-off, which we expect to be mirrored in crude. Bullish bets by speculators in ICE Brent and NYMEX WTI crude futures dropped consistently from a record high in the two weeks to February 20 but remain well above historical norms.
Crude began reconnecting with its own fundamentals this week as the financial markets appeared to be consolidating after the previous two weeks’ extreme volatility. But the unease around inflation and interest rates, which maintained pressure on equities, was a driver in the crude markets too. This was especially evident in the intraday price movements of Brent and WTI futures round the clock, which were often in sync with the movements in the respective region’s stock indexes.
Understanding the ongoing relationship between the turmoil that racked the financial markets across the world starting February 2 and crude prices is important. As long as the financial markets remain volatile — current signals suggest continued turbulence — we see the linkage remaining intact. That means looking at just the usual oil price drivers will yield only part of the picture. The US dollar has re-established a strong inverse correlation with crude prices since December and will also be buffeted by the shifting expectations on interest rate hikes. That offers another reason to keep a close watch on the financial markets.
Fears over a more hawkish Fed re-emerged following the release Wednesday of the minutes of the January Federal Open Market Committee meeting. The minutes showed several members of the Fed policy-making body had revised up their forecasts for economic growth in the US and elsewhere in the near term compared with their outlook in the December 2017 meeting. The market interpreted that as bullish and confirming expectations of three quarter-point interest rate hikes by the Fed through 2018.
The benchmark US 2-year Treasury yield closed at 2.26% Wednesday, its highest in nearly a decade, and the S&P 500 and Dow Jones Industrial Average indexes tumbled. The dollar closed at its highest level in a week. Brent settled a mild 17 cents higher on the day, while WTI eased 22 cents.
Crude climbed 1.5-1.8% Thursday after the US Energy Information Administration reported a surprise decline of nearly 1.62 million barrels in commercial crude inventories in the country for the week to February 16. However, Brent and WTI futures were alternating between green and red in intraday trading Friday, moving in step with the mood in each region’s stock markets, before being led to a strong finish by a rally in the US stocks.
Understand the mechanics of oil pricing. Learn how global benchmark oil prices are set and how that information percolates down to the price tag at the petrol pump.
Attend "What Determines the Price of Oil" - https://goo.gl/fz3YrL with Vandana Hari this March 2018 in Singapore
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According to the Nigeria National Petroleum Corporation (NNPC), Nigeria has the world’s 9th largest natural gas reserves (192 TCF of gas reserves). As at 2018, Nigeria exported over 1tcf of gas as Liquefied Natural Gas (LNG) to several countries. However domestically, we produce less than 4,000MW of power for over 180million people.
Think about this – imagine every Nigerian holding a 20W light bulb, that’s how much power we generate in Nigeria. In comparison, South Africa generates 42,000MW of power for a population of 57 million. We have the capacity to produce over 2 million Metric Tonnes of fertilizer (primarily urea) per year but we still import fertilizer. The Federal Government’s initiative to rejuvenate the agriculture sector is definitely the right thing to do for our economy, but fertilizer must be readily available to support the industry. Why do we import fertilizer when we have so much gas?
I could go on and on with these statistics, but you can see where I’m going with this so I won’t belabor the point. I will leave you with this mental image: imagine a man that lives with his family on the banks of a river that has fresh, clean water. Rather than collect and use this water directly from the river, he treks over 20km each day to buy bottled water from a company that collects the same water, bottles it and sells to him at a profit. This is the tragedy on Nigeria and it should make us all very sad.
Several indigenous companies like Nestoil were born and grown by the opportunities created by the local and international oil majors – NNPC and its subsidiaries – NGC, NAPIMS, Shell, Mobil, Agip, NDPHC. Nestoil’s main focus is the Engineering Procurement Construction and Commissioning of oil and gas pipelines and flowstations, essentially, infrastructure that supports upstream companies to produce and transport oil and natural gas, as well as and downstream companies to store and move their product. In our 28 years of doing business, we have built over 300km of pipelines of various sizes through the harshest terrain, ranging from dry land to seasonal swamp, to pure swamps, as well as some of the toughest and most volatile and hostile communities in Nigeria. I would be remiss if I do not use this opportunity to say a big thank you to those companies that gave us the opportunity to serve you. The over 2,000 direct staff and over 50,000 indirect staff we employ thank you. We are very grateful for the past opportunities given to us, and look forward to future opportunities that we can get.
Headline crude prices for the week beginning 15 July 2019 – Brent: US$66/b; WTI: US$59/b
Headlines of the week
Unplanned crude oil production outages for the Organization of the Petroleum Exporting Countries (OPEC) averaged 2.5 million barrels per day (b/d) in the first half of 2019, the highest six-month average since the end of 2015. EIA estimates that in June, Iran alone accounted for more than 60% (1.7 million b/d) of all OPEC unplanned outages.
EIA differentiates among declines in production resulting from unplanned production outages, permanent losses of production capacity, and voluntary production cutbacks for OPEC members. Only the first of those categories is included in the historical unplanned production outage estimates that EIA publishes in its monthly Short-Term Energy Outlook (STEO).
Unplanned production outages include, but are not limited to, sanctions, armed conflicts, political disputes, labor actions, natural disasters, and unplanned maintenance. Unplanned outages can be short-lived or last for a number of years, but as long as the production capacity is not lost, EIA tracks these disruptions as outages rather than lost capacity.
Loss of production capacity includes natural capacity declines and declines resulting from irreparable damage that are unlikely to return within one year. This lost capacity cannot contribute to global supply without significant investment and lead time.
Voluntary cutbacks are associated with OPEC production agreements and only apply to OPEC members. Voluntary cutbacks count toward the country’s spare capacity but are not counted as unplanned production outages.
EIA defines spare crude oil production capacity—which only applies to OPEC members adhering to OPEC production agreements—as potential oil production that could be brought online within 30 days and sustained for at least 90 days, consistent with sound business practices. EIA does not include unplanned crude oil production outages in its assessment of spare production capacity.
As an example, EIA considers Iranian production declines that result from U.S. sanctions to be unplanned production outages, making Iran a significant contributor to the total OPEC unplanned crude oil production outages. During the fourth quarter of 2015, before the Joint Comprehensive Plan of Action became effective in January 2016, EIA estimated that an average 800,000 b/d of Iranian production was disrupted. In the first quarter of 2019, the first full quarter since U.S. sanctions on Iran were re-imposed in November 2018, Iranian disruptions averaged 1.2 million b/d.
Another long-term contributor to EIA’s estimate of OPEC unplanned crude oil production outages is the Partitioned Neutral Zone (PNZ) between Kuwait and Saudi Arabia. Production halted there in 2014 because of a political dispute between the two countries. EIA attributes half of the PNZ’s estimated 500,000 b/d production capacity to each country.
In the July 2019 STEO, EIA only considered about 100,000 b/d of Venezuela’s 130,000 b/d production decline from January to February as an unplanned crude oil production outage. After a series of ongoing nationwide power outages in Venezuela that began on March 7 and cut electricity to the country's oil-producing areas, EIA estimates that PdVSA, Venezuela’s national oil company, could not restart the disrupted production because of deteriorating infrastructure, and the previously disrupted 100,000 b/d became lost capacity.