Caspian Energy Insight: August 15, 2017
Oil prices continued to linger above $50 within the past month. While short positions are currently being closed, hedge funds continue to boost their net long position regarding Brent, hinting a further market recovery in the upcoming weeks. They had been wrong several times in the past, most recently leading to the closure of Astenbeck fund by Andy Hall, which defined the $100 bpd era of oil. The fund continued its bullish stance even when the prices collapsed down to $30, keeping their skepticism about shale producers. Yet, eventually, they reported double digit losses and had to close down the fund. Still, despite all those winners and losers of oil trade, the long and short positions of funds regarding oil futures give an idea about price trends.
With the current rise in bullish long positions, there are multiple reasons behind the reasoning of the hedge funds.
Current crude stocks are declining in the US while Saudi Arabia also announced that they will continue to decrease their exports to the US in the upcoming two months. At the current stage, the profitability of the American shale producers gains importance as the US will look into the domestic producers and other import sources to maintain its crude stocks and domestic consumption levels. There were already expectations about American shale producers to be profitable at the $45-55 per barrel range, yet a new analysis of shale company statements is more precise, showing that the producers are only profitable above $50 per barrel.
With the traders and non-American oil producers continuing to hunt for the exact price range for American shale producers’ profitability, it is possible to say that the current $50+ market is profitable for such producers.
OPEC And The Saudi Arabia
The Saudi economy continues to send out positive signals regarding economic recovery. Foreign reserves are going strong for the first time in 14 months and in the second quarter, the budget gap narrowed down thanks to increasing oil revenues. This puts the kingdom at a more advantageous position with the IPO of Aramco around the corner.
In recent weeks the financial officials of the kingdom are meeting with executives from New York and London to decide where to list the company. While London has all the economic advantages while requiring less transparency from the kingdom, the close political ties between the US and the SA still put NY at a more favorable position. Still, the more important question will be whether the IPO will value the company more than $1.5 trillion. While the country executives hope valuation close to $2 trillion, with the currently shaky oil market, estimations are at a more conservative level, below $1.5 trillion.
While the Saudi Arabia is struggling domestically and busy with finding a venue for Aramco’s listing, it is also pushing for greater compliance for oil production quotas for both OPEC and non-OPEC producers. The kingdom has announced that they will cut down their exports by 520K bpd in September alone. At the current pace, the producers are cutting 1.8M bpd till March 2018 in order to balance the world oil market. While bigger producers like the SA and Russia are trying to limit their production levels as well as pushing other countries to comply. Still, Iraq, the UAE, Kazakhstan, and Malaysia demonstrated little adherence with Libya still recovering (990K bpd in July) from Arab Spring.
United States will become a net natural gas exporter in 2017 according to EIA reports. The country is already exporting natural gas for a long time but it had imported more than it produced while consuming more than 90 percent of its domestic production. However, recently, this has changed, making the country a net exporter in recent months.
The US is currently world’s largest natural gas producer since 2009 (after surpassing Russia). The country is boosting its exports to Mexico as well as expanding its liquefaction capacity for LNG exports to the world markets. In four years, the country is expected to increase its LNG export capacity by five times.
Although individual American states, like California, continue to commit themselves to fighting climate change by reducing emission levels in their respective states, at the national level, the American commitment is lagging behind the world. There have been two essential developments regarding the issue at the national level.
First, the US formally notified the United Nations to withdraw from Paris Agreement on August 4, 2017, as soon as possible at a historic decision not only for the country but also the world overall. Furthermore, new diplomatic cables show that the White House and the state department are advising the diplomats to be vague about the future of Paris Agreement and American stance. President Trump campaigned against the agreement last fall and he said he could agree on a new fair agreement instead. Meanwhile, the administration is also reviewing a report by federal agencies showing the near-term threats of climate change for the US.
Ukraine and Sanctions on Russia
Following the bipartisan sanctions passed by the United States against Russia, European Union joined the US in expanding its own sanctions to new personnel and firms. These new sanctions in energy field prevent companies to participate in new oil projects in Russia or where Russia holds at least 33 percent stake as well as potential sanctions on companies investing or facilitating Russian export pipelines.
With current sanctions expanding, Russia will struggle further to build its two signature pipeline projects into Europe: Nordstream II and the Turkish Stream. Barring the rising animosity with the EU, Russia will also have a hard time making some European companies honor their commitments in its pipeline projects, including Siemens, Shell, Allseas, Uniper, Wintershall, Engie, and OMV.
Russia announced it commitment to go ahead with the projects while Turkey already announced that it was against the EU sanctions against Russia saying that Turkey itself had suffered from sanctions in the past. Although the cost of projects is expected to increase with new sanctions, the participating countries are still committed. Turkish BOTAS already announced that they agreed with Russian Gazprom on financing structure for Turkish Stream. With the underwater section of the pipeline is coming to a close, the next step will include the 200km land pipeline to be built. The pipeline will have 15.75 bcm capacity, removing Turkey’s dependence on Ukrainian transit completely.
Meanwhile, Russia is also decreasing its Ukrainian natural gas transit towards Europe, costing an additional $400M to Ukraine in natural gas transit income. The current transit deal is expiring in 2019 and Moscow is desperately trying to bypass Ukraine completely. This is a historic change of state policy by Russia, consistently sustained since the 1990s when Russia relied on Ukraine for almost all of its natural gas transit to its European customers. Although the EU is trying to prevent this from happening at a larger level, Germany is not helping with its continued disregard towards Russian bypass of Ukraine.