2024-01-30 08:30:26
| Dr. Gil Befman, Chief Economist of Bank Leumi and Or Azran, Economist, Leumi
| Oil price development
In the past week, oil prices were characterized by an acceleration of the upward trend that began in the middle of December 2023, from a price level of about 73 dollars per barrel and about 69 dollars per barrel.
Last week, prices rose from $79 per barrel of Brent to approximately $84 and from approximately $73 per barrel of WTI to approximately $78 at the end of the previous week’s trading.
It seems that the acceleration of the price increase towards the end of the past week came against the background of better and stronger than expected economic data for the US economy, alongside news of expansionary economic policy measures by the Chinese authorities.
In addition, extreme weather conditions in the US led to temporary disruptions in the energy production processes and a decrease in oil stocks compared to the multi-year average at this time of the year.
Growth in the US was much better than expected, at an annualized rate of 3.3% in the fourth quarter of 2023 (the consensus estimate was 2.0%). This figure, published last Thursday, reflects a much better performance than that of other G7 countries, where GDP almost and froze under the influence of higher interest rates.
Moreover, “core growth”, the growth rate of final sales of domestic product in the US, slowed only slightly from 3.6% in the third quarter to 3.2% in the fourth quarter. The strength of the growth, without significant inflationary pressures, was also reflected In the US household consumption expenditure data, the PCE.
Continued growth momentum into 2024 may support energy demand.
Another factor, which may have indirectly affected the price of oil, is related to the announcement of US President Biden, who stopped last Friday the approval of new licenses for the export of Munzel gas from the US. The suspension of the new licenses comes as the administration examines how these exports affect climate change, the economy and national security of the United States.
Apart from the fact that this is a decision that is expected to disrupt the realization of plans for investments amounting to billions of dollars in gas export projects, this is a signal that may and is also relevant regarding other US energy exports, such as crude oil and distillates. This, while reducing the degree of “integration of global markets” in the field of energy , while adding to the global risk pricing in this area.
The announcement of China’s policy measures came while the authorities there stated that “efforts will be made to improve the innovation and coordination of the policy tools, to unify and strengthen the trend of economic recovery.”
In this framework, it was decided that the liquidity obligation ratio of the banking system – the RRR – will be reduced by 50 basis points for all banks as of February 5, which will allow the banks more room for maneuver to increase the credit supply.
In addition, China’s central bank, the PBOC, will reduce interest rates by 25 basis points for banks in the rural sector and small companies, which may ease economic activity somewhat. There were also reports of a “massive activation” of Chinese state-owned companies to significantly increase their activity in China’s and Hong Kong’s stock markets.
The acceleration of growth in China, through a set of policy measures, may also be reflected in the demand for energy.
Volatility in oil prices, while on an upward trend, also comes against the background of continued threats in the Red Sea, alongside the expansion of international power in the region, which now also includes Belgium. This force tries, without great success, to prevent the disruption of maritime trade routes.
Last Friday, January 26, 2024, a ship carrying oil was hit by a direct hit from a missile sent by the Houthis from Yemen and the price of oil reacted immediately in the markets.
| Global supply and demand
The US commercial decreased in the week ending January 19, 2024 by about 9.2 million barrels of oil, and it reached the level of about 420.7 million barrels. The US commercial crude oil inventory is about 5% below the average of the last five years for this period .
U.S. oil refinery inputs averaged about 15.3 million barrels per day during the week ending January 19, 2024, about 1.4 million barrels per day less than the previous week’s average. Refineries were operating at 85.5% of their operating capacity, while A decrease that reflected disruption to activity due to extreme weather conditions.
Against this background, production decreased last week and amounted to an average of approximately 8.3 million barrels per day.
US crude oil imports averaged about 5.6 million barrels per day last week, down about 1.8 million barrels per day on average from the week before. Over the past four weeks, crude oil imports averaged about 6.5 million barrels per day, 5.3 % more than the corresponding period of the previous year.
At the same time, the export of crude oil dropped to the level of about 4.4 million barrels per day, a negative change of about 595 thousand barrels per day from the previous week. Thus, the net import of US crude oil decreased by about 1.2 million barrels per day on average (about 8.7 million barrels in cumulative terms per week).
Against the same background, net imports to the USA decreased by 52.1% compared to the previous week, when these new changes happened as a result of extreme weather conditions, which affected the output of refineries and led to a decrease in theirs and, as a result, also to a decrease in oil stocks.
The total of oil products supplied in the last four weeks averaged about 19.5 million barrels per day, an increase of 3.3% compared to the corresponding period last year. During the last four weeks, the supply of gasoline averaged 8.1 million barrels per day, an increase of 3.7% compared to the same period last year.
The amount of jet fuel supplied increased by 1.6% compared to the corresponding four-week period last year.
According to a Reuters report, OPEC will likely decide on oil production levels for the months of April and beyond in the coming weeks. No dramatic decisions are expected at this meeting. Last November, the group agreed to a voluntary cut in oil output totaling 2.2 million barrels per day during the first quarter of the year.
This move was led by Saudi Arabia, which voluntarily reduces a million barrels per day. If these cuts are reversed, OPEC+ will return 2.2 million barrels per day to the market and that will leave a cut of 3.66 million barrels per day, previously decided at previous meetings of the organization, decisions that are still in effect.
The OPEC organization maintains production limits in the member countries of the organization, these production limits are intended from the point of view of the OPEC organization to prevent a significant drop in prices. The tightening of production limits by OPEC member countries has left those countries with a free production cushion, which according to the EIA estimate is now about 5.4 million barrels per day and according to a Bloomberg survey, the surplus is even larger and has been gradually increasing since the last quarter of 2022.
owns about 60% of the production associated with OPEC. This ability provides the organization with a security cushion against fluctuations in oil supply and demand. In addition to this, Russia, which pledged to deepen the reduction of its oil exports, did fulfill its commitment to reduce oil exports to 500,000 barrels per day.
This includes limiting the export of crude oil to 300,000 barrels per day and petroleum distillates to 200,000 barrels per day. By reducing oil exports, OPEC aims to maintain an optimal price range for itself.
The EIA’s short-term energy forecast was unchanged last week, the US Energy Agency still expects US retail fuel prices to decline in 2024 due to inventory growth, as a result of increased refinery capacity.
In addition, there is an estimate that in 2025 oil consumption will decrease and pull the price down, and as a result the price of diesel and gasoline will also be on a downward trend.
The uncertainty as a result of the Houthis’ threats to the Bab al-Mandab islands has not gone away, although the international force, which was established to deal with the risks in the region, has expanded and now also includes Belgium, France and India. But despite the US and UK’s attempt to deter the Houthis, they have stated that they will not stop their attacks on the international shipping lanes in their area.
As a result, many shipping companies do not sail through the Red Sea, but sail through the Cape of Good Hope, and therefore sea shipping prices are still on the rise. Last Friday, January 26, 2024, the Houthi rebels launched a missile at an oil ship named Marlin Luanda, which is linked to the United Kingdom, and hit it directly, which led to a fire in the oil warehouse and this was reflected in the oil prices in the markets.
As a result of the recent events in the Red Sea, many companies are choosing to extend their voyages towards Europe, and as a result, there may be delays in receiving shipments of goods and energy.
The “Iron Swords” war led to shocks in the energy market, but the Russia-Ukraine war also has an effect on volatility in recent days. On January 19, 2024, four oil tanks caught fire in a large storage facility in the town of Klinchi. Following a Ukrainian attack on January 21, 2024, a fire broke out at Russia’s main fuel export terminal located on the shores of the Baltic Sea, which is used to ship oil and gas products to international markets.
The targeting of attacks on Russian oil processing and storage facilities represents a new risk to the country’s ability to sustain its oil exports. The attacks are focused on harming the ability to export oil products through the Black Sea, with the aim of making it difficult for Russia in the energy sector and disrupting the trade balance. A situation where such attacks by the Ukrainians will intensify, can create fluctuations in the energy market as a result of a decrease in oil supply.
At the same time, fewer markets import the Russian. Russia’s reliance on four countries, mostly Asian, as destinations for Russian coal, has increased since sanctions against Russia began as a result of the Russian invasion of Ukraine. According to Global Trade Tracker the EU sanctions, which take effect in August 2022, are aligned with increased coal exports from the US to Europe.
China, South Korea, Turkey and India are currently the leading importers of coal from Russia and accounted for approximately 80% of Russian coal exports between August 2022 and July 2023, compared to 47% in the same period a year earlier.
Recently, Libya announced the resumption of production and export activity from its main oil field, Sharara, while maintaining the stability of production at the level of approximately 1.2 million barrels per day. This decision is expected to bring about changes in the global oil market, while increasing the supply and affecting oil prices.
This step may calm the markets, especially given the fact that Libya is not subject to the threats of the Houthis. This development emphasizes the impact of regional conflicts on energy markets and their prices, and the need to consider economic and geopolitical factors in analyzing fluctuations in the global market.
| The natural gas economy
The prices in the USA rose towards the end of the past week, apparently against the background of strong and surprisingly positive economic data in the USA. Thus, the price of natural gas reached after trading hours this past weekend, 1/26/2024, at approximately $2.7 per MMBtu, while increasing from the previous week’s low price of approximately $2.4 on 1/22/2024.
The low price that was during the past week came after the announcement of an expected relaxation in the weather situation, which allowed a decrease from the record price of natural gas of the last month, which was recorded on 12/1/2024 following extreme weather conditions.
The total consumption of natural gas in the US decreased by approximately 7.6% in the week ending 01/24/24, compared to the previous one. Gas consumption in the residential and commercial sectors decreased by approximately 12.3% after reaching an average daily peak of 41.5 Bcf/d the previous week.
The combination of increased daily use for local needs during the past month, alongside operational difficulties caused by the weather, is reflected in a temporary slowdown in US LNG export activity.
The change in net inventories in the US amounted to a withdrawal of approximately 326 Bcf for the week ending January 19, 2024. This, compared to the average weekly withdrawals over the past five years which was 148 Bcf.
Natural gas inventories amounted to 2,856 Bcf, which is 5% more than the average of the last five years, and 4% more than the corresponding week last year. The average withdrawal rate is 4% higher than the five-year average for this season (November-March).
Assuming that the volume of withdrawals will be consistent with the average daily withdrawals for this season, which is 15 Bcf per day, the total natural gas inventory is expected to be approximately 1,775 Bcf on March 31, 2024, which is approximately 142 Bcf higher than the five-year average for this period.
As mentioned, the decrease in inventory was due to extreme cold conditions that led to the freezing of gas pipelines and the cessation of activity of certain rigs.
In Europe, the price of natural gas, , continued to decrease during the past week to about 26.6 euros per megawatt/hour, but then, during the last weekend, prices recovered and increased to about 28.5 euros per megawatt/hour. It seems that the drop in the European price at the beginning of the week was influenced by the data of a relatively high inventory for this period of the year of natural gas.
The increase towards the end of the week, especially last Thursday – came at the same time as the publication of good economic data for the US economy and the announcement last Friday regarding the cessation of issuing new export licenses for LNG from the US.
The combination of the increase in demand for energy from the US as a result of the supply problems through the Red Sea, with the announcement of the Biden administration, temporarily suspending the approval of new licenses for LNG exports, is reflected in the increase in the price of gas in Europe.
The delay is part of a broad review by the US designed to assess the impact of exports on climate change, the economy and security. The delay of the licenses could harm the potential expansion of gas exports by the US and thus harm the availability of gas to Europe.
| The short and medium term outlook
The security events in the Red Sea are escalating and rising. Until now it seemed that the Houthi rebels attacked ships carrying goods, but now it seems that following the escalation and attacks of the international force in the area, the Houthis are also attacking ships carrying oil, in particular those that are not connected to “friendly” countries.
This situation leads in the short term to an increase in sea shipping prices and also to an increase in energy prices. As a result, the demand for available energy supply from the US will increase and therefore energy exports from the US are expected to grow in the short term, a situation that is already reflected in the increase in prices.
Beyond that, it seems that the OPEC organization is not planning any significant steps in the oil market in the near term.
In addition to the weakening of domestic demand for oil and petroleum distillates in the US, as a result of a transition to green energy sources, as long as the export of oil and distillates from the US to other countries, especially emerging and developing countries, continues as usual, there will be room for a decrease in oil prices in the future.
The writer is the chief economist of Bank Leumi. The data, information, opinions and forecasts in the review are provided as a service to readers, and do not necessarily reflect the official position of the bank. They should not be considered a recommendation or a substitute for the reader’s independent judgment, or an offer or an invitation to receive offers, or advice for the purchase and/or making investments and/or any operations or transactions. The information may contain errors and changes may occur. The bank and/or subsidiaries and/or companies related to it and/or controlling owners and/or interested parties may from time to time have an interest in the information presented in the review, including financial assets presented in it.
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