Forties disruption: the perfect excuse for others to expand oil production
A crack in the Forties Pipeline System in the UK North Sea has sent the price of Brent up 1.5% to US$65.70/bbl as the pipeline needs to be closed until repaired. We see this event lending short-term support to Brent oil, but headwinds for oil prices remain in the medium-term. Forties disruption.
The Forties Pipeline System operated by INEOS carries over 40% of UK’s North Sea oil from over 80 offshore fields to refinery facilities onshore. Its capacity of 450,000 barrels per day represents a large proportion of UK production, but only a small portion of the 96 million barrels of global output. Nevertheless, it still accounts for more oil than Gabon and Equatorial Guinea’s (two of OPEC’s smaller members) combined production. Moreover, Forties oil is the largest source of oil in the Brent Benchmark. With Brent widely seen as the global benchmark for oil prices, the impact of a relatively small disruption could have large global consequences (most likely pushing up the price of close substitutes).
The length of the disruption is uncertain
The length of the disruption is uncertain, but could last several weeks. As a result the price-support from this event is likely to be transitory.
US production and exports are expanding strongly in the high price environment of recent weeks and this latest catalyst could push production even higher. Rig counts in the US have been rising for the past eight weeks and crude oil production has risen over the past seven weeks to a level not seen since the early 1970s. We expect US production to continue to hit fresh all-time highs as we head into 2018. The expansion of US oil production will weigh on global prices.
The spread between the US benchmark
At the moment the spread between the US benchmark, West Texan Intermediate, and Brenthas widened to the highest level since 2015 when the US had pipeline problems that created a glut in US crude that couldn’t be processed quickly enough. Back in 2015 a wide spread persisted because the US did not allow oil exports to most countries. In December 2015 the rules changed and the US can now export substantial amounts of oil. We expect the availability of US oil to temper gains in the Brent benchmark.
The latest OPEC/non-OPEC deal to curb production until the end of 2018 has a fatal ‘get-out’ clause: the deal will be reviewed in June 2018. The clause likely came as a result of the insistence of Russia and other non-OPEC countries who don’t require such high oil prices to balance their government budgets. This week the U.A.E. and Kuwait have made it clear that they will push for discussion of some sort of exit strategy in June if the market is no longer over-supplied. OPEC’s price support could thus end prematurely.
We thus see the Forties disruption as a short-term price support, with plenty of headwinds to come in the medium term.
Nitesh Shah, Research Analyst at ETF Securities
Niteshis a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).
Vi har sett en hel del prisfluktuationer när det gäller oljepriset, både Brent och WTI, något som också har påverkat de ETPer och börshandlade fonder som speglar priset på råolja, till exempel United States Oil Fund (NYSEArca: USO)och United States Brent Oil Fund (NYSEArca: BNO). När det gäller Oljepriset, det är inte bara OPEC som styr utvecklingen av denna råvaras värde, det finns ett stort antal andra faktorer som påverkar.
OPECs påverkan är emellertid stor, men kanske minskande? Från oljemarknadens håll har flera bedömare sagt att de anser att OPECs inflytande minskar när de oljeproducerande ländernas organisation nu minskar produktionen i syfte att minska pristrycket på oljepriset. Samtidigt hoppas många av de amerikanska frackning företagen på att priset på olja skall hoppa upp över 50 USD igen för att de skall kunna kapitalisera på det. Enligt vissa estimat är det på denna nivå som skifferoljeproducenterna går break-even nu när framsteg inom teknik och borrteknik har hjälpt till att skära ned kostnaderna.
I en återföring av tidigare sentiment accepterade Saudiarabien Irans högre produktionsmål som ett specialfall. Tidigare har OPECs samtal brutit samman eftersom Iran ansåg sig orättvist fördelat eftersom landet hävdade att det inte kunnat exportera i samma mängd som sina konkurrenter då Iran var satt under strikta globala sanktioner. Iran har därför argumenterat för att öka sin produktion till nivåerna innan sanktionerna började att gälla. Utöver Iran finns det andra problembarn inom kartellen som skulle kunna undergräva ansträngningarna för att minska oljeproduktionen inom OPEC.
Siktar mot 60 USD per fat
Saudiarabien, OPECs största producent, siktar på ett oljepris om 60 USD per fat, en nivå som många av OPECs medlemmar skulle trivas med. Nivån är emellertid inte tillräckligt hög för att uppmuntra amerikanska skifferproducenter att avsevärt öka sin produktion.
I en nyligen publicerad analys skriver den amerikanska investmentbanken Goldman Sachsom oljan. Goldman Sachs degraderar effektivt OPEC från en prissättare till en lageransvarig eftersom banken anser att OPECs långsiktiga kontroll över det internationella oljepriset har upphört till en följd av skifferolja och –gas. Skiffer ger en betydligt snabbare produktion, från investeringsbeslut till topproduktion kan cykeln vara så kort som sex till nio månader. Detta skall ställas mig flera år för den konventionella oljan.
Aktörerna på oljemarknaden oroar sig för att de amerikanska skifferoljeproducenterna kommer att öka sin produktion om oljepriset stiger. Den senaste rigräkningen visar på ett ökat antal riggar, och kreditmöjligheterna är nu större än tidigare vilket gör att dessa företag kan komma att dra fördel av en kortsiktig prisuppgång för oljepriset.
Flera OPEC-medlemmar har redan meddelat att de är beredda att delta i en förlängning av produktionsneddragningen, eller i alla fall erkänt behovet av en sådan förlängning. Även Saudiarabien har mjukat upp sin tidigare bestämda ståndpunkt, från att tidigare ha varit ovilliga att stärka den amerikanska skifferoljeindustrin så har landet meddelat att det kommer att stödja en förlängning av produktionsstoppet om oljelagren förblir höga. Oljepriset, det är inte bara OPEC men organisationen har helt klar stor betydelse.
Olja
Pris på olja, både på WTI och Brent. Du kan se det aktuella priset på WTI- och Brent-olja, samt hur det oljepriset har utvecklats över olika tidsperioder. Överst visas WTI-priset och under det Brent-priset.
WTI (West Texas Intermediate), även känd som Texas Light Sweet, är den typ av olja som oftast används som riktmärke för prissättning av olja. WTI handlas i New York. Brent är den typ av olja som är vanligast i Europa. Oljefutures går till leverans varje månad året om. Olja handlas bland annat på New York Mercantile Exchange under tickersymbolen CL (avser Light Sweet Crude Oil) och huvudkontraktet prissätts i USD och cent per fat.
Weekly Investment Insights Oil – Room to run lower
Highlights
Oil prices have made decisive moves lower over the past fortnight as burgeoning US production has dampened optimism around the OPEC accord.
Reports of increased output from Saudi Arabia and exempt nations Nigeria and Libya have added to concerns that the production agreement is less robust than previously assumed.
Should key crude benchmarks break lower through nearby support levels we could see the complex return to pre-November levels.
Burgeoning U.S. output
After months of range trading, the oil complex has made a decisive move lower as growing US output has dampened optimism surrounding the impact of last year’s OPEC/non-OPEC production agreement on global supply. Last week’s release of US crude oil inventory data instigated the latest move, as stocks grew at four times the expected rate to reach a new peak of 528.4m barrels. Bearish indicators have been mounting against the oil price for some time as news flow from the US has increasingly pointed towards resurgence in shale output as a result of the more favourable $50-$55/bbl price range. Research reports from Barclays and Citi (Source: Financial Times) both detail a 27%-36% surge in capital spending this year by North American oil and gas companies. These estimates are corroborated by the growth in the widely observed US oil rig count, which has climbed 95% from its trough from 2016 (see Figure 1). Our view is that oil prices could still see some downside from current levels, as they sit some 8% above the range from before the November accord and the agreement itself appears increasingly fragile.
Intentional or Seasonal?
While Riyadh has repeatedly stated its commitment to stabilising the oil market, the latest monthly OPEC report suggests that matter may not be so simple. Overall, according to secondary sources, OPEC’s compliance with its stated target currently sits at 91% and has indeed largely been driven by Saudi’s commitment to the agreement. However, the report also shows that Saudi’s own sources recorded an increase in production last month to near 10m barrels per day (mbpd), closer to estimates from the International Energy Agency (IEA) of 9.98mbpd. The bounce suggests that the reductions in oil volume seen in recent months could actually be a result of more seasonal adjustments to output rather than a conscious effort to stabilise the oil market. If this is the case we could see output normalise further in coming months, posing an additional threat to the accord.
Furthermore both exempt nations, Libya and Nigeria, have increased output by a combined 193k bpd since December, a 9% increase. The resurgence of US shale is likely to have put significant strain on the continued compliance to the OPEC agreement beyond the June expiry date. Should the deal fall apart, we could see oil prices sink further.
Broken support levels could spur selling
Having fallen approximately 8% on average over the past week both crude oil benchmarks face significant support. Brent and WTI crude oil prices have been dragged lower to the highs that persisted until the OPEC accord was announced, at $51/bbl and $49/bbl respectively (which also happen to coincide with their respective 200 daily moving average). Prices failed to consistently penetrate these levels for 15 months before November so a break below at this stage could trigger selling pressure. In this scenario prices have potential to fall to the 50% retracement of the recent 14 month run higher at $46/bbl and $43/bbl respectively for Brent and WTI. An abrupt end to OPEC’s current deal could be the catalyst to trigger such a move.
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Safe havens under the spotlight amid political uncertainties
ETF Securities Weekly Flows Analysis – Safe havens under the spotlight amid political uncertainties
Strong inflows of US$141mn in gold ETPs amid political uncertainties driving market sentiment while improving auto sales triggered inflows in platinum ETPs.
Inflows in robotics themed ETFs in February rose to US$80mn as prices reach new highs every week.
US$22mn inflows in industrial metals ETPs as investors question Indonesia’s plans to relax the ban on ore exports.
Strong inflows into gold ETPs amid political uncertainties driving market sentiment. Gold ETPs recorded US$141mn inflows last week as gold prices rose 1.1% to nearly US$1,242/oz. We believe gold price will end this year at US$1,230/oz as central banks are taking a more aggressive tone on interest rates. Weaker US Dollar and low real rate environment could drive gold price higher to US$1,300/oz by the end of the first half of the year, potentially aided by a number of political events (Dutch, French and German elections).
Rising interest in the sectors of the future bodes well for robotics themed ETFs. Last week saw the third consecutive week of double-digit inflows into robotics ETFs as the underlying index rose 9% this year, reaching a new high every week in the year so far. Total inflows for February 2017 now stand at US$80mn, the largest monthly inflows since inception in October 2014.
Investors increase exposure to industrial metals as they question Indonesia’s plans to relax the ban on ore exports. The announcement made in January weighed on industrial metal prices as the lifting of the ban in place since 2014 would increase global supply. However, the impact will likely be limited as free shipments apply to companies that are already building processing plants and for a maximum of five years. Following the announcement, nickel prices initially fell by 8% before surging up again, triggering US$11mn inflows in nickel ETPs and US$22.5mn in industrial metals ETPs.
Precious metals with industrial applications also saw some traction amid increasing auto sales in most major economies. Platinum ETPs recorded US$8.7mn inflows last week as prices rose 1.7% on better-than-expected auto sales in most major economies. The volatility of the South African Rand combined with the ever-present potential for political upheaval will likely remain a headwind for the platinum group metals.
Oil ETPs recorded outflows for the third consecutive week as US oil production continues to recover. Last week saw US$31.4mn outflows from oil ETPs with investors mainly selling WTI crude while Brent ETPs recorded inflows of US$10mn. This reflects the traditional view of Brent being more affected by the decline in European oil fields and OPEC production policy while WTI is mainly driven by US oil production particularly US Shale oil. We believe that oil prices will remain under pressure in the near term as US oil production and inventories continue to increase.
Video Presentation
Edith Southammakosane, Research Analyst at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.
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ETF Securities Research team ETF Securities (UK) Limited T +44 (0) 207 448 4336 E info@etfsecurities.com
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OPEC led the market to expect non-OPEC countries will cut production by 600,000 barrels per day. This weekend a group of non-OPEC countries decided to cut by 558,000 barrels per day. The market rallied. Go figure! The mirage of deep oil production cuts
We believe that market optimism about the OPEC/non-OPEC deal is excessively high. We acknowledge that OPEC has brokered a landmark deal and the cartel has clearly departed from the prior two-year strategy of ‘market share at all costs’. However, what non-OPEC have signed up for falls short of what OPEC promised. That adds to the sleight of hand around OPEC’s “1.2 million barrel per day cut”. When factoring in the exempt countries and higher-than-actual production reference figures, OPEC is only likely to cut 0.7 mb/d from October levels. As highlighted in today’s International Energy Agency monthly report, OPEC was pumping out 34.2 mb/d in November, a record high and more than 1.4 mb/d higher than a year ago. OPEC’s monthly report out tomorrow is likely to confirm that members were producing at a break-neck pace ahead of the agreement.
We also believe that the incentive to cheat on the deal is always present. This is not new: game theorists have written volumes on the “prisoner’s dilemma” in cartel behaviour. The fact that many of the participants in the deal are not even part of the cartel compounds the problem.
While Brent oilis currently trading around US$56/bbl – slightly above the upper end of our range (US55/bbl) – we believe that there will be a pullback as the details of the deal are absorbed by the market. Market disappointment over compliance on the deal will not be the only trigger for price declines. At current prices, we expect US tight oil supply to accelerate, which will limit further price increases. Last week, rig counts in the US increased by 21, the highest weekly increase since April 2014, highlighting the pace at which the nimble US market is responding to oil prices above US50/bbl. We expect the supply response from the US to continue.
Nitesh Shah, Research Analyst at ETF Securities
Niteshis a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).
