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US President Trump broke all norms of diplomacy and protocol during the NATO meeting in Brussels on the 11th of July 2018, when he accused Germany of being “a captive of the Russians” because of its dependence on Russian energy supplies. He went on to say that “Germany is totally controlled by Russia because they will be getting 60-70% of their energy from Russia and a new pipeline”.
He was, of course, referring to the jointly European and Russian-financed Nord Stream 2 gas pipeline that would deliver a total of 110 billion cubic metres per year of Russian gas supplies under the Baltic Sea, to Germany and the European Union (EU) thus bypassing the Ukraine. It will be completed by the end of 2019.
Oil prices don’t lie. They reflect the true picture in the global oil market from an economic and geopolitical angles. In the aftermath of the historic summit between US President Trump and North Korean Leader Kim Jong Un, oil prices were flat. What does this tell us?
The fact that the oil markets largely ignored the much-anticipated summit could mean that they viewed the summit as all flash with little substance. And though both sides hailed the summit as a breakthrough, there was nothing to show except a declaration pledging to work towards denuclearization with no details about how this is to be achieved.
US President Trump announced on the 8th of May 2018 that he is walking away from the 2015 nuclear Iran deal known as the Joint Comprehensive Plan of Action (JCPOA) into which the United States had entered with Iran and the five permanent members of the United Nations Security Council plus Germany (the P5+1) in order to exclude the prospect of Iran developing an indigenous nuclear weapons capability until at least 2028.
But the Trump decision is unlikely to bring about a meaningful improvement in the security situation of the US, Israel, or the Middle East generally, nor significantly damage Iran’s strategic capabilities. However, it changes some of the dynamics with regard to the President’s anticipated summit with North Korean leader Kim Jong-Un.
The 26th of March 2018 will go in history as the most momentous day for the United States’ economy, China’s economy and the petrodollar and also for China’s status as an economic superpower. In that day China launched its yuan-denominated crude oil futures in Shanghai thus challenging the petrodollar for dominance in the global oil market. And in that very day 15.4 million barrels of crude for delivery in September 2018 changed hands over two and a half hours—the length of the first-day trading session for the contract.
Exactly one week after China launched its crude oil futures, the petro-yuan surpassed Brent trading volume. How long will it take it before overtaking the petrodollar? (see Chart 1).
In February 2018, an international consortium led by France’s Total and also comprising Italy’s Eni and Russia’s Novatek, signed two exploration and production agreements covering Blocks 4 and 9 offshore Lebanon, providing for the drilling of at least one well per block in the first three years. The consortium’s priority will be to drill a first exploration well on Block 4 next year, Total said.
As for Block 9, Total and its partners are fully aware of the Israeli-Lebanese maritime border dispute in the southern part of the block that covers only a very limited area (less than 8% of the block’s surface). Given that the main prospects are located more than 25km from the disputed area, the consortium confirms that the exploration well on Block 9 will have no interference at all with any fields or prospects located south of the border area,” the French company said (see Figure 1).
Russia’s cooperation with OPEC has led to the OPEC/non-OPEC production cut agreement credited with virtually rebalancing the global oil market and pushing oil prices towards almost $70/barrel and also putting a $60 floor under oil prices, up from $50 in 2017.
Russia and Saudi Arabia, the architects of the production cut agreement made it clear that the agreement will go beyond 2018 but in a format that reflects the changing market conditions such as a rebalanced market and rising oil prices. After all, both Russia and OPEC face a major rival: US Shale. It looks as if Russia could become a member of OPEC in all but name.
In an article I wrote for the Research Centre of Energy Management (RCEM) at ESCP Europe Business School on the 2nd of March 2017 under the title “Oil Prices Will Be Mostly Bullish in 2017”, I said that the oil price will break through the $60 level in 2017. This the oil price did when it has risen to more than $66.78 a barrel in December 2017.
And despite efforts by vested interests including the International Energy Agency (IEA) and the United States Energy Information Administration (EIA) to dampen oil prices, I am now projecting that the oil price could be heading towards $70/barrel or even higher during 2018 and $100 in 2020.
The OPEC meeting is over and the organization has extended production cuts throughout 2018. The decision is obviously crucial to supporting oil prices, but also of the utmost importance to the vision and future of one man, Prince Mohammed bin Salman, Saudi Arabia’s de facto head of government and Crown prince (the king’s son).
The oil price is key to the success of Prince Mohammed bin Salman’s Vision 2030 which aims to build a dynamic twenty-first Saudi economy.
Oil is like a coin: one side is Economics and the other is geopolitics and the two are inseparable.
The petrodollar came into existence in 1973 in the wake of the collapse of the international gold standard which was created in the aftermath of World War II under the Bretton Woods agreements. These agreements also established the US dollar as the reserve currency of the world.
Independence has been a lifelong dream for many Iraqi Kurds and so the 25th of September 2017 referendum was met with understandable jubilation across Iraqi Kurdistan with over 90% voting for secession from Iraq.
Although the referendum was non-binding, it pointed to a deteriorating geopolitical situation between the Kurdistan Regional Government (KRG) and neighbouring countries. Baghdad urged neighbouring countries to shut down flights into the region and threatened a blockade. Iran stopped oil trade with Iraqi Kurdistan and also banned flights to the region. And Turkey, which fears stirring separatism among its own Kurdish population, has threatened similar action. Turkish President Recep Tayyip Erdogan called the vote “treachery” and suggested the region would "not find food or clothing" if sanctions were implemented.
Geopolitics & US Self-Interest
In imposing new sanctions on Russia, the US Congress aimed to punish Russia for its alleged meddling in the US elections in 2016. Still, these sanctions were mostly motivated by US self-interest, geopolitics and blatant US efforts to delay if not prevent Russia’s emergence as the world’s energy superpower.
The target of these sanctions as in the previous ones is Russian banks and companies as well as Russian oil and gas projects. However, the most contentious issue could well be the sanctions on pipelines. Key projects such as Nord Stream II and the TurkStream pipelines are at the very heart of the sanctions.
The US has always been opposed to Nord Stream II, which it views as Russia’s attempt to solidify its hold on Europe’s energy supplies (see Map 1).
Venezuela’s Deepening Crisis
With 300.9 billion barrels (bb) of proven oil reserves, Venezuela holds the biggest reserves in the world and also accounts for 92% of Latin America’s reserves. This is 13% bigger than Saudi Arabia’s. Still, the United States Geological Survey (USGS) estimates that there may be more than 513 bb of extra-heavy crude oil and bitumen deposits in Venezuela’s Orinoco belt region.
Venezuela, a country that should be one of the wealthiest in the world, remains mired in deepening crisis. Its currency (the bolívar) has virtually collapsed while its economy shrank by 10% in 2016 and annual inflation is poised to exceed 720% in 2017.
With oil prices alternating so frequently between bullish and bearish conditions, a global oil deficit could be making its way stealthily through the global oil market.
Last November, the International Energy Agency (IEA) warned that a shortage could set in as soon as 2020, as the investment shrinkage brought on by the 2014 oil price crash bears fruit. Prices, the IEA had said at the time, could jump significantly at the end of the decade. The IEA reiterated its concerns more recently in its World Energy Investment 2017 Report adding that the rate of new oil discoveries is at its lowest level in more than 70 years. Overall, global spending on oil and gas will rise by a moderate 3% this year, compared to the 44% between 2014 and 2016.
Since the discovery of oil in Saudi Arabia seventy nine years ago, the country has been synonymous with oil. But now the sands under which 16% of the global proven oil reserves lie are beginning to shift under the feet of its leaders.
Saudi Arabia whose beneficence, peace-making efforts, soft power and great oil wealth brought it to the forefront of influential countries in the world over a period of more than half a century, is now embroiled in a crescent of conflicts involving Iran, Iraq, Syria, Yemen and now Qatar not to mention its uneasy relations with the United States.
With oil prices ebbing and flowing against a background of OPEC and non-OPEC production cuts’ extension and US shale oil production inching up, nobody is paying enough attention to the fast-approaching oil supply gap.
Despite the recent dip in oil prices, industry experts are predicting a supply gap and rising oil prices by 2020. This is due in large part to an oil investment drought marked by almost three years of consecutive decline in oil prices, a statistic that has no precedent in the oil industry. This year a report by the International Energy Agency (IEA) projected that if oil investment remains stagnant over the next few years, by 2020 we will see a significant increase in the price of oil as global demand continues to climb.
In the run-up to 2014 sanctions, US oil giant ExxonMobil led by its then CEO Mr Rex Tillerson, and Russia’s oil giant Rosneft invested $3.2 billion in a project for drilling for oil in the Kara Sea in the Russian sector of the Arctic — a region that Rosneft estimated it could have more oil than the entire Gulf of Mexico. But the sanctions forced Exxon Mobil to halt drilling.
The US shale revolution and the rising shale oil production have had a seismic impact on the global oil market contributing in no small measure to the steep decline in crude oil prices since July 2014. Equally US liquefied natural gas (LNG) exports could have a similar impact on the global gas market possibly weakening further current low gas prices. The irony, however, is that without relatively higher gas prices, the potential and prospects of sizeable US LNG exports could be restricted.
In 2008 the United States overtook Russia to become the leading natural gas producer in the world. Just a few years ago the US was expected to be a major importer of natural gas. The shale revolution has virtually reversed that trend and enabled the US to start exporting LNG.
Despite very positive signs in the global oil market, oil prices have never managed to break through the $60/barrel barrier since the OPEC production cuts were implemented in January 2017. On the contrary, they have declined from $57/barrel two weeks ago to just over $50/barrel today.
On the face of it, this could be due to two factors: one is rising Shale oil production and the second is that the glut in the global oil market might have been bigger than what was previously estimated. But circumstantial evidence suggests there could be a third factor, namely concerted efforts by the International Energy Agency (IEA), BP through its annual Statistical Review of world energy, the US Energy Information Administration (EIA) and the Financial Times (FT) to prevent the oil price breaking through the $60/barrel barrier. The rationale is that a price under $60/barrel is good enough for US shale oil production to breakeven and not high enough to slow global economic growth. Let us analyse these three factors to find out where the truth lies.
Despite a 91% compliance by OPEC members with the production cuts implemented in January 2017 and the removal of more than 1 million barrels a day (mbd) from the global oil market, the oil price has seen a lot of volatility ranging between $53 and $57 a barrel.
And although US oil inventories have declined for the last five months consecutively according to the International Energy Agency (IEA), their levels are still close to record high. This could be due to two factors: one is rising Shale oil production and second, the glut in the global oil market might have been bigger than what was previously estimated.
Among notable promises made by US President-elect Donald Trump during his presidential elections were four particular ones that attracted the attention of the world because of their geopolitical implications and their impact on the price of oil. These were the dismantling of the nuclear deal with Iran, lifting the sanctions on Russia, enhancing US oil production and a strong dollar.
Whilst most declarations made by US presidential candidates during their election campaigning would be quickly forgotten once they are installed inside the White House, it might be wise to analyse these promises in case Mr Trump stuns the world by fulfilling some or all of them.