Why the oil market ignored the trump

One reason for the restrained production growth, some believed the lack of available production capacities of the member countries “OPEC+”. But this assumption is quickly refuted. The Minister of energy of Saudi Arabia, al-falih stressed that the country has about 500 000 bbl./day of available capacity. Novak said earlier that Russia is free to increase production to 300,000 bbl./day. The oil Minister of the UAE Suhail al-Mazrui said that his country has spare production capacity, but did not specify the exact amount.

Cautious behavior “OPEC+” a lack of understanding of the actual volume of oil that can leave the market as a result of US sanctions against Iran. These volumes are estimated at 0.5-1.5 million bbl./day. From may to August 2018, oil production in Iran decreased with increasing total four month decline has reached 240,000 bbl./day. Moreover, before the introduction of sanctions to force Iran is strongly opposed to further production growth from the “OPEC+” this may result in even greater loss of market share.

Изменение добычи в странах «ОПЕК+»*. Уровень исполнения сделки – правая шкала, изменение добычи – левая шкала. Штриховкой отмечены не имеющие квот – Ливия и Нигерия; Иран, которому так же было разрешено постепенно увеличивать добычу до 3,8 млн барр./сут.

*The level of oil production in OPEC+ in April amounted to 49.5 million barrels./day. Sources: OPEC, Bloomberg, DOE Russia

Ambiguity and the situation in Venezuela: only for the last four months of production there decreased by 200,000 bbl./day, and January 2015 (when production was at around 2.4 million bbl./day) to August 2018, this figure is made up 1.23 million barrels./day. It is expected that the decline will continue.

In fact, the Algiers meeting “OPEC+” serves as a kind of respite, because by the time of the meeting, the coalition has reached her set goals:

— The total production growth in the countries of the “OPEC” for June-August 2018 with quotas amounted to about 800 000 bbl./the day of the agreed increase in quotas by 1 million bbl./day. The missing volume of 100,000 bbl./day, if necessary, would more than offset Russia, Saudi Arabia and the UAE.

— Reduction of commercial oil reserves. Their level in the Organization for economic cooperation and development (OECD) in July 2018 amounted to 2824 billion barrels, 280 billion barrels below the five-year average figure.

— Price range of $70-80 per barrel suits most of the players in the market.

For Russia the current situation looks very positive: oil prices and revenues are growing, the country has virtually eliminated commitments to reduce production, returning to the level of October 2016 at 11.2 million barrels./day.

Further action countries “OPEC” will require much greater cooperation and compromise, because to achieve goals, subject to favourable external factors — one task and to keep the balance under the pressure of geopolitical and economic factors — is completely different.

“Twitterholic” and the oil market

In the last six months oil prices get to the cherished mark of $80 per barrel, and gasoline prices in the U.S. to $3 per gallon or more, and criticism of OPEC by the US is starting to sound more and more actively.

First statement by Donald trump that the price of oil is too high, was made in April. Then followed two statements in June before the meeting “OPEC”, the which the decision was made to increase production by 1 million bbl./day. It can create the false impression that you publish on Twitter have an impact on the oil market, the reality is, of course, wrong. But still, in addition to fundamental factors of supply and demand — supply disruptions from Libya and Nigeria, lower production in Venezuela and Iran and demand growth in 2018 — was another factor that could prove decisive.

The twenty-second of may 2018, the U.S. Congress amended the famous antitrust Sherman Act, named NOOPEC Bill. This law is more than 100 years ago, break the monopoly of Standard Oil. The amendment would broaden the scope of the Sherman Act to international cartels and monopolies, which affect the market of oil, gas and petroleum products in the United States. Such amendments to the laws of the United States has repeatedly offered since 2000, both houses of Congress. But neither President George Bush nor Barack Obama supported the initiative, warning that they will use their veto power.

Цены нефти Brent и заявления президента США Д. Трампа в Твиттере.

Prices of Brent crude and the statements of the President of the United States Donald trump on Twitter

Indeed, criticism of these amendments within the USA is extremely serious. Opponents point out that its adoption will have a negative impact on investment activity in the oil and gas industry in the country; the extremely difficult diplomatic US relations with the countries that fall under the act; effects of the entry of this law into force will be greatly delayed, and in the short term at all, oil prices could rise due to destabilization of the oil market.

It would seem that now this law can be ignored. But, first, the situation for the United States in 2018 in the oil market looks far more favourable than 11 years ago: oil production is increasing and imports from OPEC decreased. If in 2007 it was 6 million barrels./day, in 2018, he fell to an average of 3 million barrels./day.

Secondly, of all the presidents of the United States over the past two decades, Donald trump has been the most outspoken opponent of OPEC for more than 30 years, ranging from allegations of OPEC in the aviation crisis, the United States in 1970 in his book “trump: the art to make deals”, to the latest publications on Twitter. According to Senator Charles Grassley, this time NOOPEC Bill is likely “to attract the attention of the President and thereby show the world that the United States will not tolerate egregious antitrust violations by OPEC.” Therefore, the probability that this law will be higher than ever.

Why, then, following the meeting, members of the “OPEC+” decided not to increase production in the coming months? It is a workable version can be frivolous attitude to the law. But assuming the law is passed, there is a more rational explanation.

Demand doubts

One of the drivers of higher oil prices and high efficiency of the transaction “OPEC+” was a growing demand for oil especially China, India, USA and Germany since the transaction through August 2018, the growth of consumption was about 2.5 million bbl./day. The international energy Agency (IEA) forecasts that in 2018 the demand will increase by 1.4 million bbl./day, and in 2019, — 1,5 million Barr./day.

But despite the current positive Outlook, market participants have fears that global economic growth may slow down. In 2018 it is expected to record high since 2011 level is 3.9%, but a trade war between China and the US can, according to the IMF, result in the short term to reduce the rate of global GDP growth to 2.3%. Such a significant slowdown in economic growth could trigger a slowdown in demand and falling oil prices to $50-$55 per barrel.

At the meeting, “OPEC+” Saudi Arabia has expressed concern about the state of the global economy: “We have filled our warehouse to the maximum, because the demand was lower than we expected,” — said the Minister of energy of Saudi Arabia, al-falih.

The draft of a new agreement within the framework of “OPEC” in 2019 will discuss in December. Al-falih noted that the rapid growth of oil production in the US may mean the increase in commercial oil reserves in the next year, but it is still too early to say, should remain in force restrictions on the production, agreed in 2016.

Почему нефтяной рынок проигнорировал Трампа

What is the result?

In its current form, the agreement “OPEC+” executed: the market is balanced and prices are reasonable for most market participants. Thus, on the one hand, there is still great uncertainty until November 2018 real volume of oil exports from Iran, on the other — there are doubts about the pace of economic growth and oil demand, which traditionally fall at the end of the year and the first quarter of next.

Separate destabilizing the United States, which in the conditions of the pre-election period, it is important to maintain low prices for petroleum products in the country.

Agreement for the market — the lesser evil and makes at least some certainty for consumers and for manufacturers, but next year it will have to be reformatted. For parties to the agreement now the best strategy will be to maintain production levels, as well as monitoring the market before the end of the year.