Caspian Energy Insight: August 7, 2017
Oil prices rose above $50 last week for the first time in July and managed to stay above since then. Hedge fund managers cut their short positions, pressuring the prices to increase. With OPEC and non-OPEC producers struggling to keep up with the cuts, a further short term sharp increase in oil prices is not expected. At current stage, OPEC production has already increased another 90 thousand bpd with Libyan production in recovery process making OPEC fail in meeting its target once again. The country’s production level increased above 1M bpd although its pre-Arab Spring production was above 1.6Mbpd. This increase in overall OPEC production happened despite a dip in the Saudi oil production levels.
American shale producers, which most function as swing producers in the global oil market, continue to be profitable in the $45-$55 per barrel range will keep the rig count to increase. EIA reports US crude production as lingering above 9M bpd as of May, going way above the prior estimates. On top of that, the country is also exporting 2.5M bpd of refined petroleum products to the world markets, making the oil market even more complicated for the rest of the producers. Heading mainly to the Mexican and Brazilian markets, the US is now a major player in refined products market. Exports of refined petroleum products were at an all-time high for the US in 2016 and in 2017, the experts are expecting another 9 percent surge.
Venezuela missed its payments for oil field suppliers in the second quarter of 2017. Given the current economic and political outlook for the country as well as the looming American sanctions on Venezuelan government, the missing payments raised the concerns even further. The Trump administration joined a set of Latin American countries, including Brazil and Argentina, and called the elections in Venezuela a sham, increasing the possibility of sanctions even further. The US is considering cutting its light oil exports to Venezuela, which are usually used to mix with the heavy oil that Venezuela eventually exports. Currently, Venezuela also imports refined petroleum products from the US, making the Bolivarian Republic even more dependent on the US.
Elsewhere, Saudi Arabia met with hedge-fund executives last week in order to find ways to stabilize the crude market while also trying to raise $100 billion from the IPO of Aramco in Britain. The country is hoping to successfully list the 5 percent of the company and diversify its economy further away from oil. Although the country’s foreign reserves increased by $2 billion in June 2017 for the first time in 13 months, the targeted economic recovery is still distant and needs commitment in economic diversification for the long term economic stability.
Meanwhile, with growing demand in China and growing domestic oil production in the United States, China is on the verge of overtaking the US in being world’s biggest oil importer. The first six months of 2017 brought China to import 400 thousand bpd more than the US with 8.5M bpd crude imports.
Oil prices have always been cyclical and volatile with little to no predictive power resting at the hands of the traders and producers alike. Yet, looking at the historical trends in the 80s and 90s, this current downturn appears to contain similar characteristics with what happened following the expansion in the late 70s and early 80s. Still, with Strait of Hormuz, the largest choke point on earth, accounting for 18.5 percent of global petroleum transit, any potential disruption in supply could change everything in oil markets globally. Therefore, with not much potential upward changes in prices, it is still essential to keep an eye on the current and potential future conflicts in the Middle East.
Last week’s report included some states’ commitment in fighting climate change despite the current American government’s shaky stance. This included California’s renewal of its bipartisan program for limiting carbon emissions by putting a price. The current plan and the targets are ambitious but with the state itself being one of the biggest economies on earth, its plans certainly have repercussions on overall climate change targets globally.
The state aims to generate 50 percent of its electricity from renewables by 2030, almost doubling its current level. Despite the ambivalence of the Trump administration, individual commitments by single states might still encourage the rest of the world to continue in curbing carbon emissions and increasing their renewables and low carbon emission fuels capacities, like natural gas.
Ukraine and Sanctions on Russia
The United States passed a bipartisan legislation in late July to expand sanctions on Russia. This legislation comes after lawmakers addressed a series of concerns oil and gas companies raised about the package, which would limit the extent to which American and Russian energy firms could interact. The legislation specifically clarifies that only Russian energy export pipelines can be sanctioned.
Meanwhile, the Ukrainian government has cut off the electricity supply to the territories in eastern Ukraine that are controlled by Russian-backed militants, as stated by Ukrenergo’s acting director. He said that the occupied territories of Donetsk Oblast will be supplied electricity by the Kremlin. The governor of the Ukrainian government-controlled part of Donetsk Oblast said that the territories (controlled by Russian forces) owe the Oblast 3.9 billion HR in electricity payments and refuse to restore electricity.
Eight consortia, including four German giants, participated in the Turkish Energy Ministry’s 1000 megawatts wind power project tender on July 27th. The winning consortium is expected to make more than $1 billion worth of investments in the project, which will stipulate the local production of wind turbines gradually. With the completion of the planned wind power project, Turkey’s existing 6000 MW of installed wind power capacity will increase by 17 percent. The winning consortium is expected to build a turbine plant for a nearly $100 million investment by using a minimum of 65 percent local output.
Czech companies have announced their interest in participating in the modernization of the Baku refinery. They believe the project is being prepared on the modernization of the Baku refinery named after Aliyev. This is amidst efforts to become strategic partners, where the trade turnover has amounted to $201.011 million, increasing by 4.8 percent year to year.
Iran has announced a much-awaited gas pipeline that will “guarantee the steady supply of natural gas to the regions that experienced harsh winters in the past when neighboring Turkmenistan cut off gas supplies to Iran.” This project will make Iran no longer in need of importing gas from Turkmenistan and ease the transfer for supply gas to its northern provinces. No prices or other numbers have been announced yet.
Iran also announced a US naval Ship fired warning shots at an Iranian patrol ship in the Persian Gulf. The US has multiple naval bases in the region and is protecting its oil interests and supplying security for its allies in the region. The Persian Gulf has already witnessed a lot of action in the past few weeks, between Qatar and Saudi Arabia and now the US and Iran…