Caspian Energy Insight: July 31, 2017
Oil prices continue to linger between $45-50 within the past month after hitting to the lowest points with $41 in early June 2017. Hedge funds continue their short positions, putting additional strains on price risks for oil. At current outlook with global stocks being over 250M barrels higher than their 5-year average, the high points of $58 Brent in January 2017 look far away.
Regarding the continued low oil prices, while OPEC extended the ‘Oil Output Cut Deal’ until March 2018, compliance is a lingering problem. Saudi Arabia and Russia are wary of free riders and looking to find ways to enforce the rules of production quotas. However, all free riders need incentives or a hegemon to enforce the rules while the international scene is usually lacking both. Russia did surprise the international affairs experts with its bold moves in the past few years, including the annexation of Crimea and a successful overseas operation in Syria which brought solid gains on the battle ground. However, controlling the production output of oil producing countries is a far tricky process and this might be the biggest test Putin has to give before the Russian presidential elections next year.
Just one example, Kazakhstan, shows how the enforcement might not work over the unwilling participants. The oil cut from all participating countries agreed upon, collectively, cutting 1.8 million during the first half of 2017. Comparing and contrasting charts from the Oil Market Report International Energy Agency, Kazakhstan agreed to cut 20K bpd but increased to 78K bpd. Kazakhstan was estimated to produce 81 million tons of oil at the beginning of the year and are now on track to produce over 81 million tons of oil this year. The Energy Minister of Kazakhstan Bozumbayev has pushed back all questions from OPEC until September and November summits.
Therefore, so far, all attempts to enforce are in vain with no consequences on free riders in general. Still, even if the two countries could ensure compliance by the other producers, the increasing rig count in the US might ensure the continuation of a glut in the market.
Elsewhere, Saudi Arabia cut down its deliveries to the American market John Kemp of Reuters reports, with American imports of Saudi oil hitting the lowest levels within the last seven years. By putting additional emphasis on the Asian market, the Saudis decreased their shipments to the American market while the Iraqi exports to the region is increasing. Overall, showing commitment to curbing the global oil glut, the Saudis decreased their oil exports by 1M bpd compared to the same month last year. Scheduled to list Saudi Aramco next year, the country desperately needs the oil prices to increase in order to collect higher returns from the listing.
Despite the current shaky American commitment in climate change targets, some of the American states are renewing their overall targets. Califronia recently passed a new bipartisan cap-and-trade program renewing the one that is set to expire in 2020. Being one of the biggest economies in the world as a single state, California will cut its emissions by 40 percent by 2030. Providing a market solution to pollution, the state is putting a price on carbon emissions which require the energy companies to purchase permits.
Sanctions on Venezuela and Russia
United States is considering further sanction on the struggling major Latin American oil producer. The upcoming sanctions are mimicking the Iranian nuclear sanctions yet the middle eastern economy was never in such a deep economic crisis compared to Venezuela’s current situation.
Venezuela is already going through serious economic trouble with the economy shrinking 20 percent and 18 percent the last two consecutive years. The new sanctions might very well mean further foreign currency crisis for the Latin American country which already has a crashed local currency value.
On the other hand, several US refineries are already buying crude oil from Venezuela and it’ll be tricky for them to replace the Venezuelan oil with other sources. Citgo, owned by Venezuela and Russia will also be impacted by the sanctions.
Russia’s Gazprom also reports possible delays with Nord Stream II and Turkish Stream gas pipelines. Both pipelines making more strategic sense than economic one might get delayed due to the US sanctions on Russia, potentially benefiting the country by preventing excessive spending on economically problematic investments. A Carnegie Europe survey recently reports Europe’s excessive dependence on Russian natural gas and these two pipelines, albeit being delayed, will nonetheless exacerbate the situation in the near future.
Russia Energy Minister believes the country can continue with the cuts on its oil production.
Meanwhile, the main part of the China-Russia second crude oil pipeline was completed in the Heilongjiang Province, Northern China, on 7/13/2017. The pipeline is 940 km long with a capacity of 15 million tons annually. The first China-Russia pipeline moved 100 million tons of oil from 2011 to May of 2017. This shows Russia’s energy leverage by promoting energy business in China.
Meanwhile Russia and India are developing a bilateral relationship. India has joined the Shanghai Cooperation Organization (SCO). This economic, military and political alliance now contains: China, India, Kazakhstan, Kyrgyzstan, Pakistan, Russia, Tajikistan, and Uzbekistan.
During the 22nd World Petroleum Congress in Istanbul, Azerbaijani President Ilham Aliyev announced that the Trans Anatolian Natural Gas Pipeline’s (TANAP) is 77 percent finished and will be ready for final completion in 2018. Besides TANAP, Aliyev said that 93 percent of the Shah Deniz project, 87 percent of the South Caucasus pipeline, and 44 percent of the Trans Adriatic Project (TAP) have been completed. The completion of the project requires around $40 billion investment overall.
Both administrations are eyeing for further participation to the mega-pipeline from other natural gas producers in the Mediterranean and the Middle East. Upon completion of TANAP, the 1,802 km pipeline will be linked to TAP in 2020 and deliver natural gas to European markets through Greece, Albania, and Italy.