Being widely considered as an essential item in the production and consumption, crude oil is the commodity favored most not only on physical market but also on financial market. After a heavy drop from about $120/barrel in mid-2014 to less than $45/barrel in early 2015, and then reaching the bottom at $28/barrel at the beginning of this year, “Black Gold” currently is on an unclear movement as mostly affected by a long-lasting supply glut and the value of the USD – the currency used for pricing crude oil.
Fig. Brent price from 2014 until now.
The Three Main Benchmarks
Crude oil is classified based on the location and product quality (density, viscosity and sulfur content). Normally, sweet and light oil is more desirable since it is easier for production of gasoline and diesel fuel. Crude oil traders, who do not actually carry the refinery, need a straightforward way to value the commodity for their important purposes: sell and buy. There are three primary benchmarks:
This Middle Eastern crude is used as the main reference for Persian Gulf oil delievered to the Asian market. It is a slightly lower grade than WTI or Brent because of higher sulfur content, putting it in the “sour” category.
Brent is extracted from Brent-Ninian oilfield located in East Shetland Basin of the North Sea. These days, “Brent” actually refers to oil from four different fields: Brent, Forties, Oseberg and Ekofisk.
This crude oil is light and sweet, becoming an ideal for refining of middle distillates such as diesel. And because the supply is water-borne, it is easy to transport to distant locations with a relatively lower cost of transportation.
WTI is extracted from wells in the US and sent to Cushing, Oklahama via pipelines. The product is very light and sweet, mostly used for gasoline refining. It is relatively expensive to ship to certain parts of the globe since its land-locked supplies. Therefore, despite the quality, WTI is not a favorable choice as Brent.
Fig. Brent – WTI spread
As can be seen on the chart above, until 2005, Brent and WTI were not much differences in price. But in 10 years later, the explosion of US fracking technology, which uses water to extract oil and natural gas from shale, has made WTI become relatively cheaper than Brent. Recently, due to severly affects from the supply-side, the difference has been reduced but not yet returned to the initial period. Brent is currently higher than WTI of $1.01/barrel.
Fig.Transaction allocation of 3 benchmarks
Source: Intercontinental Exchange (ICE)
Dubai/Oman is traded in the Asia, WTI is in the US and Brent is the most popular in the world.
Different crude oil contacts trade on different exchanges:
Dubai Mercantile Exchange (Dubai),
New York Mercantile Exchange (WTI)
and ICE Futures Europe (Brent).
Focusing on Brent
On the ICE, Brent Crude Futures (Contract symbol: B) trades with units of trading as any multiple of 1000 barrels. Brent traded on ICE will end on the last working day two months before the expiry date. For example, every trading and purchasing activity will end on 30th September for Brent November 2016. Besides ICE, Brent was traded CME Globex with contract symbol BB, 1000 barrels/contract. Brent traded on CME will end before the 15th day of the prior month of the expiry date. In other words, Brent crude futures expiring in November, 2016 will end on 14th October.
In reality, Brent is the reference for two-thirds of all crude contracts around the world because of its mid-end quality compared to other two benchmarks: WTI and Dubai.
From the beginning of September, Brent price has been fluctuated in a range from $45.37 to $50.28/barrel without a clear trend since there are many arguments about “Freeze Output” of main petroleum supplying countries as well as the volatility of the greenback, relating mainly to FED interest rate adjustment.
Large overhangs in Oil supply
According to International Energy Agency (IEA) report on 13th September, total global supply oil in August inched down to 96.9 million barrels per day (mbpd), 0.3 mbpd lower than the same period in 2015. The reason is due to lower output from non-OPEC countries, especially in the North Sea, Russian and U.S. The total oil extracted from non-OPEC group is 1.4 million barrels/day, less than the same period last year. However, this quantity is also forecast to be rebounded in 2017 when Norway is promoting the exploiting capacity in the near future after the strike last July.
September mining output reached 11.09 million barrels per day, over OPEC’s expectation on Russian average output level in 2016 which is 10.99 mbpd.
Mining activities in Russia continue to be promoted thanks to the reduction of production cost and taxation. Last Wednesday, Eastern Messoyakha Siberia oildfield was officially put in operation, expected to provide 577,000 tons this year and reach a peak of 5.6 millon tons, or 112,000 barrels a day at the end of 2020.
Rosneft, Russia’s largest oil producer, is planning to start its Siberian Suzun oilfield, expected output can reach 4.5 million tons (90,000 barrels per day) in 2017. Meanwhile, Rosneft competitor – Lukoil PLSC – also started to test producing at the Caspian Sea’s Filanovsky since the beginning of August with approximately 200,000 barrels pumped a day.
According to Baker Hughes Inc., US oil rigs last week rebounded sharply after a slight rise in the past weeks. By the end of September, there are 425 active rigs in this country. It is 100 more from the lowest level – due to the reduction of shale oil extraction as the oil price falling too low in this May. The number of returned oil rigs can be understood as the U.S drillers have been preparing for an output increase.
Fig. The total oil rigs in the U.S
Also, oil inventories of the biggest economy in the world has been on the verge of decline. Influenced by severe storms from the Gulf of Mexico, transportation to the U.S is hampered, leading to an unexpectedly drop of 14.5 million barrels in the stockpiles during that week to the 2nd of September, the biggest decline in 15 years. In the last two weeks, US oil reserves fell to 6.2 and 1.9 million barrels respectively. The total oil inventories of this country is at 502.7 million barrels, the lowest level since mid-February 2016, but still 11% higher than last-year period.
Fig. Change in US crude inventories
On Tuesday and Wednesday, the data coming from the American Petroleum Institute (API) and U.S Energy Information Administration (EIA) relating to U.S crude oil reserves will be published.
Facing problems of current over-supply in oil market, the Organization of Petroleum Exporting Countries (OPEC) are also trying to revive energy markets and reach some positive agreements in an unofficially meeting in Algeria from September 26 to 28. Earlier, the meeting on 17th April between OPEC and Russia did not come to any consensus on stablilizing market. The main reason for the failure is argued to be Iran – the third largest OPEC oil exporter – determined to increase the production with the goal of regaining its market shares after U.S lifting sactions on Iran earlier this year. Returning to September meeting, the largest oil exporters have come to an agreement of “freeze output” plan.
The expected restrictions in OPEC output can be 32.5-33 million barrels per day, down by more than 700,000 barrels a day compared to August reading. “Not-very-well” relationship of Saudi Arabia-Iran seemed to be much eased when OPEC allowed Iran to keep the current supply. Detailed quota for each OPEC member will be discussed thoroughly in the next November. However, the question now is how OPEC can persuade others to join hands in price stabilization. If OPEC is the only one who agrees, the market share of this Cartel will definitely fall and the members will not be satisfied with that mentioned plan.
Oil production jumped from 260,000 barrels per day in August to 450,000 barrels per day in September, roughly about 70%, with many returned export terminals after 2 years. A lot of tankers also began to re-operate since 2014.
ExxonMobil (multinational US petrol company) has prepared a pipeline through Iboe in Nigeria, first depart is expected in the end of September.
Besides, Iran and China agreed to build a $1.2-billion refinery. The project will begin around late November – early December 2016 with $600 billion bilateral trade within 10 years.
Based on all this current information, agreement to cut oil supply by 3% per day of the OPEC members has not really been much to intervene in market price. A Reuters survey on Friday showed OPEC’s September production up to 33.6 million barrels per day, a record level until now, even higher than 33.53 million barrels perday in August.
Sluggish Global Demand
IEA reports two weeks ago noted that in Q3 2016, the growth of global oil demand extends its downtrend by 800,000 barrels per day. While in the last year period was 2.3 million barrels/day – the highest level in 5-year period. In the first two quarters, total demand was 1.6 and 1.4 mbpd respectively. The main cause of declining is resulted primarily from the “black-gold consumption area” as OECD members: China, India.
Fig. Growth in oil Demand in OECD 2011-2016
Q3 2016 witnessed a heavy drop in growth demand of OECD, ending a continual rise in the previous three quarters. Stagnancies in manufacturing and services in European, also the end of US driving season have led to this situation.
Meanwhile, two biggest oil-consuming economies is also witnessing a slowdown in fuel demand in production and consumption.
According to the latest published figures, in August, China imported 7.7 million barrels/day, 5% higher than the previous month and was the highest level since last December. Compared to the same period in 2015, imports rose by 22.5%. However, in volume terms, crude oil imports in September of this second largest economy is expected to decrease due to shipping operations influenced by recent disaster situation (rain storm or flood). Not to mention to the preparation for G20 lately, hundreds of factories in Hangzhou had to stop working to ensure the clean air area with green sky over this city. Besides, since the end of August, China also launched a new tax policy tightening over the activities of the teapots, causing a decline of about 1.4 thousand barrels per day in crude-oil demand.
Strategic Petroleum Resersves
In case OPEC cuts down the oil production, China and India are likely to prefer to use their strategic petroleum resersves (SPR) rather than import crude oil with higher prices. Chinese SPR accounts for about 15% of the total oil imports, equilvalent to 1 million barrels per day. Statistically, in the first half of the year, Chinese total reserves are up to 369 million barrels. This can be enough for this country in case oil prices are pushed up too high. We also should consider about the fact that China will shift to exporting in stead of importing as normal.
On the first day of October, China announced September manufacturing PMI remained at 50.4 points, below expectations of 50.5. Non-manufacturing PMI index slightly increased from 53.5 to 53.7. There has not been a clear signal proving that China will end this current stagnation permanently. On 3rd October, the Chinese currency – Yuan was officially included in the SDR basket (Special Drawing Rights), becoming the 5th reserve currency alongside with the USD, EUR, JPY and GBP. It is predicted that there will be a lot of impacts from this change. However, the Chinese market will have a longlast week holiday. So, the trading activity will probably not as active as usual and be impact on the crude oil price – the most important element in production and consumption.
World Demand-and-Supply Spread
Oil Production and Consumption (million barrels per day)
Estimated figures for the amount of oil production and consumption in the world respectively are 96.20 and 95.36 million barrels/day. Supply and demand gap tends to narrow, but not really significant. Agreement to cut production by 700,000 barrels/day of OPEC only has a real impact on energy market as non-OPEC countries also agreed to participate this plan and global enters improvement. According to EIA, not until the end of 2017 can be oil demand and supply pull back to equilibrium.
The value of greenback is unsteady
As being a dollar-priced commodity, any change in greenback’s value would directly impact on the price of oil.
Before the final decision, many traders supposed that FED would increase the interest rate in this September due to the recently positive data from the US economy, especially optimistic signals from the labor market – a major concern of FED President Janet Yellen. This led to the result that the greenback continuously fluctuated in a wide range as all markets’ attention paid on FED moves on the monetary policy meeting in September 20th – 21st.
However, the meeting ended with the decision to keep the interest rate unchanged at 0.25% – 0.5%. And left an open door of another rate hike. Markets still price at least one rate adjustment this year, perhaps in the final meeting of the year. According to CME Group’s FEDWatch tool, the possibility of rate hike to 0.5% – 0.75% in November was 10.3% and the odds for December were 55.7%.
Fig. Dollar Index DXY W1 Technical Chart
The U.S Dollar Index (DXY), a measure of the value of the greenback against its rivals, is now 95.44. It is still lower than the peak since March – 97.57 in July 25th.
Brent Forecast for October 3rd-14th:
- The monetary meeting of Reserve Bank of Australia (4/10): Australia interest rate will remain at the record low of 1.5% after the decline of 25 basic percentage points in August or there will be an adjustment.
- The U.S manufacturing PMI and non- manufacturing PMI in September (3/10 and 5/10)
- The data related to U.S crude inventories will be provided by API and EIA on next Tuesday and Wednesday respectively.
- September NFP (7/10) will continue the decline in jobs created of 3 months earlier or not. (June: 287,000, July: 255,000, August: 151,000)
- Announced on the same day with NFP, the data from Canadian labor market is also of interest when Canadian Dollar and oil price tend to have the same trend.
- Next Wednesday (12/10), the minutes of FED September meeting will be due. Then, the insight reasons why FED has not raised the interest rate might be clarified.
Fig. Brent D1 Technical Chart
On Wednesday (28/9), after EIA released that U.S oil stockpiles continuously decreased and OPEC reached the agreement of cutting oil supply, Brent price jumped up and broke through the moving average of 50 days. In 29/9, oil price was over $50/barrel, reached the peak of $50.41/barrel. In the U.S second-half session and the Asian first-half, oil price continuously decreased partly due to the recovery of U.S strength against some optimistic economic data announced. According to the report by U.S Bureau of Economic Analysis, GDP in Q2 grew 1.4%, higher than the expectation – 1.3%. In the first quarter of this year, GDP growth was 1.1%. Thus, the world largest economy is still developing stably while the labor market is assessed to nearly approach the full employment status.
Initial unemployment claims in the week ending on 21/9 was 254,000. There was no significant difference compared with the figure of 251,000 applications in the previous week. Before the data was released, the forecast figure had been 260,000 applications for first-time unemployment benefits. The optimistic data reinforced the possibility of adjustment at least once this year, pushing the value of the greenback. Additionally, in the early November, U.S President Election will officially take place, with the winner was temporarily Mrs. Hillary Clinton after the first debate conducted last week. The final result will have considerable effect on the U.S strength because of the contrast in the attitude of politics and economy of two candidates.
Looking at D1, easy to see that price created the Double Down pattern at the bottom of 45.36. Brent price is forecasted to rise to $51/barrel in the next 1-2 weeks.
Fig. Brent H1 Technical Chart
At the beginning of this week, Brent created a 95-pip gap-down from the closing price last week. Then, immediately went up and filled the gap. In the middle of Asia session on Monday, with a relatively thin volume, the price moved around $50/barrel because Chinese market was shut for holiday. In the end of Asia session and the beginning of Euro session, the price went up and reached the peak of $50.34/barrel and remained below this area until now. This week, Brent price is forecast to go down at $49.55/barrel before rebounding.
Fig. Price of Brent delivery in December (Intraday) (ICE)
At 2h30 (EST), Brent delivery in December on ICE now trades at $50.10/barrel. Intraday price fluctuates in a wide range and there is no clear trend due to the “excitement” of traders to the cutting supply plan of OPEC calming down. This drags the Brent slightly down while U.S oil inventory put the pressure to push the price up.
Fig. Price of Brent delivery in December (3-month) (ICE)
Last Friday (30/9), Brent futures for November delivery on ICE expired, investors and speculators switched their cash flow to contracts still in transaction. This is one of the reasons why Brent futures for December delivery went up today. Expectation Brent price in December to reach at $50.43/barrel.
Scenarios based on two main concerns in the next 1-2 weeks: Agreed quota of OPEC and US September NFP
Scenario 1: OPEC faces the problem of dividing quota among member countries, Non-farm in September is optimistic.
The production of U.S shale oil is now gradually growing back. If there are some problems and arguments in the “freeze output” agreement reached in September 29th, oil price will be under pressure to go back to the point before the OPEC unofficial meeting. OPEC members may even boost their capacity, increase export production to hinder the possibility of losing market share to the countries outside OPEC.
Besides, in the case that the new jobs added data in September in U.S meets the expectation, the strength of U.S Dollar will be reinforced in the context that CNY did officially join the SDR basket. Being dollar-dominant, “black gold” will face the risk of lower prices.
There is possibility that Brent can go back to $45-46/barrel.
Scenario 2: OPEC faces the problem of quota division, September Non-farm does not meet the expectation.
Two contrast impacts: the failure of “freeze output” drags price down while USD be weaker due to disappointed September NFP.
Expectation price to fluctuate from $47-51/barrel.
Scenario 3: OPEC reaches the agreement in quota division, September Non-farm Payroll is positive
If OPEC reaches an agreement in plan “cutting supply”, oil price will jump up, much higher than the threshold $51.5/barrel. However, if greenback up on encouranging US labor market, even put pressure to drag the price down.
In this case, price may fluctuate in wide margin from $47-51/barrel.
Scenario 4: OPEC reaches the agreement of quota, Non-farm does not meet the expectation.
Two main factors tend to support for the Brent price. That would push the price to $53/barrel since June. The price is even likely to go back to $60/barrel.
Research of Fiinvesting.com
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