PRICE CAN BE STRONGER
FT wrote, one of the factors both accompanying and abetting the current rally in emerging market assets is the recent jump in the oil price, with Brent crude up about one-fifth to $50 a barrel since the start of this month. It is now back to levels not seen since last autumn (apart from a brief flurry this June). What is going on?
Quite a number of things, argues Medley Global Advisors, a macro research service owned by the FT. On top of the weaker dollar and technical factors such as reduced summer trading and expiries in the options markets there is a continued drawdown in US gasoline inventories, US production declines and dreams of a cold northern hemisphere winter (of which more later).
But the most immediate spur to the crude price has been talk from Saudi Arabia's new oil minister that hinted at another attempt by the kingdom to organise an output freeze among Opec members.
To most investors, the oil cartel continues to look like a dysfunctional organisation. There are few things the Saudis and Iranians can agree on, for a start. And the former have been raising their own production over the summer while preaching forbearance at others — though much of that extra oil is being burnt domestically rather than exported. So the risk of a market disappointment leading up to the next Opec meeting, which is not until the end of November, is very possible.
Having said that, the Saudis very much regard $50/barrel as a floor for the oil price and are already extending feelers to Russia and other less hardline Opec members regarding potential output quotas, while their own exports have actually been stable to slightly down this year. So some type of production freeze remains a real possibility.
Meanwhile, the global balance between supply and demand continues to adjust in favour of higher prices. Output in Nigeria is hovering around 1.4m barrels/day, some 700,000 b/d down from 2015's peak as more than 10 separate attacks on facilities in the Niger Delta this year have taken their toll. MGA remains pessimistic about the government's capacity to pacify a new generation of militants who are pushing — however unrealistically, ultimately — to secede from Abuja.
In Libya, despite repeated attempts to establish a unified government and some success in pushing back Isis, infighting between the various rival political and religious movements remains the order of the day and the bulk of the country's oil facilities remain shut in. Libya, which once pumped 1.6m b/d is currently managing just over 300,000 b/d.
On top of that, Angola is on course for a big drop in output later this year as its refineries go into maintenance and production is also down across most of Latin America (especially Venezuela) and — most significantly — in the US shale oil basins.
The US, in fact, is the final piece in the puzzle since this is where the rebalancing of supply and demand can be most easily observed and monitored. This rebalancing hit a hiccup earlier this year as the exceptionally warm winter caused American refineries to switch early and aggressively from producing distillates (which encompass fuel oil, diesel and kerosene) used for heating to making more gasoline (petrol). The result has been soaring gasoline inventories that have depressed refinery margins, causing them to process less crude ... which has fed back in the form of a lower oil price.
That process should reverse as we head for the autumn and then into winter, Medley believes, as refineries shift back to producing distillates. And while distillate inventories are high by historical standards, they are in better shape than gasoline stocks. The key to what happens next is what kind of winter we will get in the US and the northern hemisphere in general.
A big part of the unseasonably warm winter in 2015/16 was due to the strongest El Niño effect in the past 40 years, as measured by the rise in water temperatures in the equatorial Pacific. This tends to have a warming effect across the globe.
Notably, a strong El Niño tends to be followed by a strong La Nina, during which cool water wells back up into the Pacific and reverses everything. This happened in the early 1980s, the mid-1990s and most recently when a warm 2009/10 was followed by a very cold northern winter in 2011/12 — boosting demand for heating fuel and thus running down inventories and pushing up prices.
Forecasting the weather is hardly a sound investment strategy. But coupled with all the other factors discussed above, it suggests that crude oil could be entering a more stable trading range of $50-$70/barrel rather than falling back below $50 again for a significant period. Not only would that please the Saudis, it also suggests significant upside for investors compared with what is currently priced into the market.
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LUKOIL - The plan is based on the conservative $50 per barrel oil price scenario. Sustainable hydrocarbon production growth is planned in the Upstream business segment along with the growth in the share of high-margin projects in the overall production. In the Downstream business segment, the focus is on the improvement of operating efficiency and selective investment projects targeted at the enhancement of product slate.
BP - BP will acquire on completion a 43% equity share in Lightsource for a total consideration of $200 million, paid over three years. The great majority of this investment will fund Lightsource’s worldwide growth pipeline. The company will be renamed Lightsource BP and BP will have two seats on the board of directors.
REUTERS - Brent crude was up 69 cents, or 1.1 percent, at $64.03 a barrel by 0743 GMT. It had settled down $1.35, or 2.1 percent, on Tuesday on a wave of profit-taking after news of a key North Sea pipeline shutdown helped send the global benchmark above $65 for the first time since mid-2015. U.S. West Texas Intermediate crude was up 45 cents, or 0.8 percent, at $57.59 a barrel.
ROSATOM - On December 10, 2017, the construction start ceremony took place at the Akkuyu NPP site under a limited construction licence issued by the Turkish Atomic Energy Agency (TAEK). Director General of the ROSATOM Alexey Likhachev, and First Deputy Minister of Energy and Mineral Resources of the Turkish Republic, Fatih Donmez, took part in the ceremony.