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Oil surged on growing Venezuelan, Iran and Libyan disruption coupled with China optimism and lower USD, but faded on Russian jawboning

calendar 15/04/2019 - 11:04 UTC

Crude oil (WTI/May 19) closed around 63.89 in the US session Friday (12th April), surged almost +0.49% and made a session high of 64.65, jumped over +1.6% on growing Venezuelan, Iran and Libyan disruption coupled with China and OPEC+ cut optimism and lower USD, but faded and closed at lower level on Russian jawboning led by President Putin and oil minister Novak. Russia already signaled its willingness to raise oil output after June. Some other OPEC+ member countries may also hike from July if Venezuelan/Iran disruption continues.

For Russia, oil around $60-65 is an ideal level for their export, Ruble strength, oil infra, and capex. Thus, Putin is also not willing (like Trump) to let oil surge again to $75 levels, while Saudi Arabia has an incentive for Aramco to allow oil surge above even $80.

On Tuesday (9th April), oil slumped -0.65% to close around 63.98 and slipped from 6-months high of 64.79 on downgrade of global GDP growth by the IMF, Trump’s threat of trade war with the EU and as Russia indicated that it may not participate in any OPEC+ cut agreement after June’19 because of falling supplies as a result of Venezuelan/Iran disruptions.

On Tuesday, Russian President Putin said Russia did not support an uncontrollable rise in oil prices and that the current price suited Moscow.

Putin clarified: "We are ready for cooperation with OPEC in decision-making ... But whether it would be cut, or just a stoppage at the current level of output, I am not ready to say. We are not supporters of uncontrollable price rises--of course; we and our partners ... are closely watching the market. We agreed that if there is a need for joint efforts, we will gather in the second half of the year and hold discussions. Russian companies had their own plans and their intention to develop new fields should be (also) taken into account”.

The Russian Energy Minister Novak said earlier on Tuesday: “There would be no need to extend the output deal if the oil market was expected to be balanced in the second half of the year—but all options were on the table”.

On late last Monday (8th April), another key Russian oil ministry official Dmitriev indicated that supply cuts may not be required after June in a sudden change of the previous stance.

Dmitriev said: "It is quite possible that given the improving market situation and falling stocks, (OPEC and its allies) could decide in June this year to abandon supply cuts and subsequently increase output. This decision will not mean the end of the deal, but a confirmation that participants continue their coordinating efforts when it is important not only to cut but to increase output depending on market conditions”.

Dmitriev further pointed out: “It could be appropriate for Russia to increase output by 228 kbpd, by which it had previously cut production, and maybe even further. It is possible that as part of the June (meeting) a decision may be taken, subject to market conditions at that time, that it is necessary to remove these reductions”.

Another key Russian oil industry player and influential, very close to Putin, Rosneft CEO Sechin, argued: “Russia should abandon output cuts as Russia is losing market share to the United States, which is not participating in production cuts and has hence been boosting output to record levels of some 12 mbpd”.

As a reminder, Russia and Saudi Arabia are now producing around 11 mbpd and 10 mbpd of oil against America’s over 12 mbpd. Although, Saudi Arabia has significant spare capacity to produce more, for Russia, around 11.5-12.00 mbpd may be the actual output limit of the country at present, considering aging oil fields, oil infra and muted oil capex in the last few years for oil volatility.

Thus, even if Russia restores its oil production to the pre-OPEC+ cut levels by increasing 228 kbpd, there will be some shortage of supplies. Russia fears to lose its oil market share to the US, but lack of heavy/medium grade crude oil may be also tough for the US to compensate the shortage of Venezuelan/Iran oil with its light sweet crude oil. In that sense, the demand for Russian grade (Ural) heavy/medium oil is increasing day-by-day with higher prices (premium) and thus now Russia wants to take this opportunity to increase its oil output for better market share and revenue/bottom line.

But oil jumped almost +2.09% on last Monday (8th April) despite Russian jawboning, to close around 64.40 on Fresh Iran tensions as Trump designate Iran’s Islamic Revolutionary Guard Corps (IRGC), an elite military force of Iran, a foreign terrorist organization to pressure Iran by various means of sanctions.

In any way, overall oil gained almost +1.28% for the week, while jumped almost +6.09% in April (till Friday). Oil also soared almost +30% in Q1-2019 and +36% till mid-April after plunging around -44% in Q2-2018. Thus oil almost recovered the epic loss of Q2-2018, caused mainly by Trump’s soft Iran sanction stance as Trump permitted top 8-Iran oil customers to buy their oil requirement from the country (Iran) for the sake of price stability (lower oil). Oil was also buoyed by OPEC+ narrative of production cut extension beyond June’19 for another 6-months to Dec’2019, led by Saudi Arabia and also Russia (despite their apparent unwillingness now).

But over the last few months, Trump admin is pressuring those 8-countries (like China, India, Japan, EU, South Korea, Italy, and Turkey) and their individual oil companies to stop dealing with Iran and Venezuela. As a result, there is now a heavy shortage of Iranian/Venezuelan grade heavy/medium cheaper crude oil in the global market, especially in those 8-countries, where most refineries are designed to process heavy/medium grade cheaper crude oil by sophisticated technology to produce gasoline, diesel, and petrol at a cheaper rate.

Although the US is now trying to replace the Venezuelan/Iranian shortage with its own lightweight sweet crude oil (shell), it’s largely failed. The US is now the highest oil producing country, surpassing even Russia and is fast aiming a net exporter of oil at the expense of Venezuela and Iran. But its’ not enough and those 8-countries are now increasingly buying costly Russian (Ural) grade medium/heavy crude oil to run their refineries. And the spread between crude oil (WTI) and Brent oil is also increasing.

On Sunday, Iran’s oil minister Zangeneh said:

“Mr. Trump should choose whether to add more pressure on Iran or keep fuel prices low on gas stations in the US. We continue to work, but what's important is that the oil market is in a fragile state and that there is not so much supply for the demand. Venezuela is now in difficulty; Russia has been banned; Libya is in a state of unrest and the US has lost a part of its oil output. These indicate that the states of production, supply and demand are fragile”.

“If they want to add pressure on Iran, this fragility will exacerbate. Such statements (by Trump) are mostly propaganda-oriented rather than calming the market. But that will not be the case. The price of oil is rising day by day, reflecting growing concerns in the market”.

The Iranian oil minister clarified: “Oil prices are increasing every day. That shows the market is worried. Venezuela is in trouble. Russia is also under sanctions. Libya is in turmoil. Part of U.S. oil production has stopped. These show the supply-demand balance is very fragile. If they (the Americans) decide to increase pressures on Iran, the fragility will increase in an unpredictable way. Mr. Trump should choose whether to add more pressure on Iran or keep fuel prices low at gas stations in America”.

The Iranian oil minister may be trying to convince Trump not to sanction seriously Iran for the sake of lower oil price for the US consumers ahead of the 2020 Presidential election, but his reasoning is quite correct for the primary reasons behind oil’s recent jump.

Oil was also boosted by better Chinese economic data this week, positive for demand in oil contrary to an earlier perception of synchronized global contraction.

Oil was also helped by increasing Libyan geopolitical unrest, which could affect its oil supplies. As per reports, battling in and around Libya’s capital Tripoli has intensified in recent days, with the Libyan National Army (LNA) conducting some airstrikes on the city and its airport.

The international community, including the US, called on the LNA to cease fighting. Libya’s main oil fields are away from Tripoli and are already in territory controlled by the LNA. They don’t face immediate disruption, but because the LNA could become stretched by fighting for Tripoli, the possibility for outages is on the rise. The head of Libya's National Oil Corporation warned on Friday that renewed fighting could wipe out crude production in the country. As per reports, bombing by a warplane occurred on Friday near the Mellitah oil and gas plant, jointly operated by Italy's ENI and Libyan state oil firm NOC. The plant supplies Italy with gas through the Green-stream pipeline.

Overall, oil is boosted as production and exports from Venezuela continue to fall, and concerns continue regarding possible production difficulties in Libya and Algeria. The Trump administration's goal of 'zero-imports' from Iran also continues to support oil prices.

Oil was also supported on Friday amid lower USD, thanks to higher EUR and GBP on better than expected Eurozone economic data (industrial production) and talk of 2nd Brexit referendum by the British FM Hammond.

But oil was also dragged on late Friday on the concern of higher US production as Trump issues executive orders seeking to speed up oil and gas pipeline projects by making it harder for the US states to intervene with environmental issues. The orders are a response to the oil and gas industry, which has complained that pipeline delays caused by high-profile protests and court cases have slowed expanded production and oil capex.

Trump is expected to sign an executive order on Wednesday that could accelerate the approval of new oil and gas pipelines by stripping states of some authority to hold up projects due to environmental or public health concerns. Still, the effect of the order is unclear since any such changes would require an act/approval of Congress.

Friday’s Baker Hughes oil rigs data showed that active US oil rigs edged down to 833 from prior 831, declined for the 2nd week in a row. Overall, for the last 4-months, US shell oil companies are cutting oil rigs steadily and focusing on the bottom line rather than the top line (volume) amid huge volatility in oil. As per some estimate, below $40, the US shale oil may be unviable.

On 5th April, Friday oil jumped almost +1.58% to close around 62.18 on economic optimism and higher demand after Goldilocks US NFP job data and rebound in Germany’s industrial production.

On 10th April, Wednesday, oil jumped +0.98% to close around 64.61 on mixed EIA inventory report and falling OPEC production data led by a sharp decline in Venezuelan oil and Saudi Arabia. The OPEC’s monthly report showed the cartel’s output fell significantly in March, led by declines from Venezuela and Saudi Arabia. The data showed overall OPEC crude production fell in March by 534 kbpd sequentially to average 30.02 mbpd, confirming again that the group is complying with its December agreement to reduce output.

As per the OPEC report, Saudi Arabia cut output by 324 kbpd in March, to 9.8 mbpd, while OPEC member Venezuela, which has been disrupted further by Trump sanctions, power outages, and a collapsing economy, saw output fall by 289 kbpd to just 732 kbpd. Venezuela was producing 2.4 mbpd as recently as 2015.

On Wednesday (10th April), EIA data shows that US crude oil inventories edged down to +7.029 mb from prior +7.238 mb, higher than the expectations of +2.294 mb (API: +4.091 mb). The US crude oil imports edged up to +0.210 mb from prior +0.386 mb. The US Cushing crude oil inventories slumped to -1.133 mb from prior +0.210 mb. The US EIA weekly distillates stocks dropped -0.116 mb from prior -1.998 mb, lower than expectations of -1.300 mb drawdown. The US gasoline inventories plunged to -7.710 mb from -1.781 mb, higher than the expectations of -2.009 mb drawdown.

Overall, the EIA report was mixed amid volatile crude inventories (unexpected addition in one week and drawdown next week), higher unexpected weekly distillates stocks, while helped by unexpected drawdown at Cushing and in gasoline inventories. The crude inventories build on the Gulf Coast has been helped by a tick higher in imports and a drop in exports, while the unexpected drawdown in gasoline inventories was helped by higher refining activities after spring maintenance coupled with increasing demand for the summer driving season.

On early Monday EU session, oil slumped -0.85% and is currently trading around 63.35 and made a session low of 63.27 after Russian finance minister Siluanov said on Saturday weekend that Russia and OPEC may decide to boost production to fight for market share with the US but this would push oil prices as low as $40 (a level unviable for the US shale oil).

Siluanov said: "There is a dilemma. What should we do with OPEC- should we lose the market, which is being occupied by the Americans, or quit the deal-- the oil prices will go down, then the new investments will shrink, American output will be lower, because the production cost for shale oil is higher than for traditional output (production cost) as oil prices could drop to $40 per barrel or even less for up to one year. But there has been no decision on the deal yet and I do not know whether OPEC countries would be happy with this scenario”.

As per another report, OPEC could raise oil output from July if Venezuelan and Iranian supply drops further and prices keep rallying, because extending production cuts with Russia and other allies could overtighten the market.

Technical View: Crude Oil/WTI (May-19)

Technically, whatever may be the narrative, time and price action suggests oil now has to sustain above 62.90 for a further rally to 64.10/64.85*-65.50/66.00* and 67.95/68.50-69.00/69.75* in the near term (under bullish case scenario).

On the flip side, sustaining below 62.70, oil may fall to 62.00/61.10*-60.85/60.25* and 59.85/58.90-58.40/57.80 and further 57.40-56.85 in the near term (under bear case scenario).



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