We continue keeping you informed on the results of our activity and IFC specialists’ take on the situations and processes in global and regional economies.

In October 2017, the assets value of the WellMax investment portfolio increased by 1.04% in USD and EUR, which is equivalent to 13.22% per annum, with monthly compounded interest. The annual yield amounted to 14.24% in rubles and 11.6% in yuans, with monthly compounded interest.

The assets value of the WellMax Premium investment portfolio increased by 5.19% in USD over the period from October 10, 2017 to November 10, 2017.

In the last month, quotes of the gas assets in our portfolio showed growth, which corresponded to our forecast and resulted in a significant increase in the assets value of the WellMax Premium investment portfolio. It should be mentioned that we had predicted the driving factors already in the July economic review. 

The significant increase in the assets value of the WellMax Premium investment portfolio over the last month, was caused in the first place by the positive price dynamics of the gas companies stocks in our portfolio.  

Southwestern Energy Company & UGAZ ETF securities, which were mentioned in our previous economic reviews, saw the greatest growth over the last month. Thus, Southwestern Energy Company stocks grew by 14.4% for the month from the last reporting date, whereas UGAZ ETF quotes grew by 13.46%, which can be seen from the charts below (source: Yahoo Finance).

 

The winter heating season begins, which is the main driver for the growth of gas assets quotes. The USA starts it with the lowest natural gas stocks over the last 3 months.   

In accordance with the United States Department of Energy, gas volume in the country's underground storage as of November 3, 2017, amounted to 3,790 bln. cu. ft., which is 5.5% less than the volume of stocks prior to the previous heating season of last year (4,009 bln. cu. ft.) and 1.8% less than the average rate over the five years (3,861 bln. cu. ft.).    

It should be mentioned that we had predicted the drop in stocks below the 5-year average and last year’s levels in the July economic review:

(https://internationalfinancialcommunity.com/1565-july-2017)

In the short run, natural gas prices in the U.S. are likely to get additional support from a fall in temperature, which is expected for the next two weeks in the key regions in terms of natural gas consumption – the East Coast of the U.S. and the Great Lakes, which can be seen from the charts below (source: NOAA National Weather Service).

The oil market saw a steep growth in the last month, which positively affected the WellMax portfolio yield. The Brent & WTI prices have rallied to the highest rates since the mid-2015 and levelled off there.  

There were two main reasons of the October price rally in the market: a general positive news background and growing geopolitical tension. 

Thus, in mid-October, crude oil prices picked up amid the aggravation of contradictions between the USA and Iran. President Trump made a statement, which triggered the escalation of the conflict. He said that the nuclear deal with Iran did not serve the U.S. national interests anymore. He also intends to raise the issue of imposing sanctions, as we expected it in the previous economic review.

Later on October 16, the world's crude oil prices continued growing amid the confrontation unfolding in the Iraqi city of Kirkuk, where the Iraqi armed forces entered into conflict with the Kurdish Peshmerga forces. The Kirkuk Province conflict between Baghdad and Kurdish autonomy escalated after the independence referendum held by the Kurds on September 25 without consent of the Iraqi Government, which we also had mentioned in the previous economic review.      

Though the Iraqi Oil Ministry declared no changes in crude oil and gas output in Kirkuk, market participants were worried about a possible decrease in crude oil export from Iraqi Kurdistan, which pushed higher crude oil prices. Later events proved the worries reasonable. As of November 1, 2017 the crude oil export from Iraqi Kurdistan to the Ceyhan Terminal in Turkey decreased to 216 thousand BPD. It also should be mentioned that on October 31 the main oil pipeline transfer to Ceyhan terminal amounted to 288 thousand BPD, whereas prior to the September events  the average daily transfer of raw hydrocarbons amounted to 600 thousand BPD.       

The October decrease in output and export from Northern Iraq affected dramatically the cartel’s oil production total. According to Reuters, the OPEC’s October oil production fell by 80 thousand BPD to 32.78 million BPD, whereas the OPEC’s last month oil pact compliance reached 92% against 86% in September.    

The oil quotes got additional support as several countries-participants claimed possible prolongation of the oil pact after March 2018. Saudi Arabia, Russia, Iraq and Kuwait announced their readiness to continue balancing the market. Nigeria’s Oil Minister Emmanuel Ibe Kachikwu also announced his readiness to support the prolongation of the OPEC+ global pact. At the same time, the Minister mentioned that Nigeria was ready to support the prolongation under the conditions acceptable for the country considering the oil output of 1.8-1.9 million BPD to be a sufficient level for further participation in the global pact.

Whereas, a steep growth of crude oil quotes in early November resulted from several pieces of news from Saudi Arabia, which were rather positive for oil. Apart from news on a large-scale anti-corruption campaign unfolded in the kingdom, on November 4, the Houthi rebels launched Iranian Burkan missile from Yemen towards the Saudi capital, Riyadh, providing another support for crude oil prices. On November 5, the Saudi Arabia-led coalition Air Force launched strikes against rebels in the capital of Yemen. U.S. President Donald Trump called Iran guilty of launching the missile. Despite the fact that Iran rejected accusations of involvement in the launch, the Saudis called it “a blatant act of military aggression by the Iranian regime” and claimed that “thus, affirms that the Kingdom reserves its right to respond to Iran in the appropriate time and manner, in accordance with international law and based upon the right of self-defense”.

The escalation of conflict between Iran and Saudi Arabia may lead to unpredictable consequences in the long term. On the one side, unfolding conflict between two biggest states in the region may trigger a rise in oil prices; on the other hand, aggravation of the situation prior to the Vienna meeting scheduled for November 30 may complicate negotiations of the oil pact prolongation and affect negatively oil quotes.  

The U.S. Department of Energy statistic data provided significant support for oil prices during October. First of all, it was the U.S. crude oil stocks data; according to the Department reports, from September 29 to October 27, they decreased by 16.08 million barrels exceeding expectations of market participants (-11.323 million barrels).

At the same time, as we had mentioned it in the September economic review, in September/October, U.S. crude oil export rose dramatically, whereas the import was weak (the chart below illustrates the situation). The mixture of these factors constituted the main reason of a significant drop in crude oil stocks.

Thus, as we wrote it in the previous economic review:

(https://internationalfinancialcommunity.com/1607-september-2017)

The latest data by the U.S. Department of Energy proves this thesis, as it shows that the U.S. commercial oil stocks grew by 4.091 million BPD from October 27 to November 10, instead of a decrease of 5.076 million BPD expected by the market. This occurred amidst the significant export drop and strong import growth over the same period as it can be seen from the graph above. Thus, it also should be mentioned that as, according to the U.S. DOE, the country’s crude oil output has reached its peak at 9.645 million BPD (the highest rate for almost 35 years of calculations by the Department), possible weak export results may lead to growing oil stocks in the U.S. and weak oil prices, especially in case of ongoing production.

At the same time, the positive news background is likely to keep the Brent price above $60 a barrel until the end of the Vienna OPEC meeting on November 30. A possible fast resolution of Kurdish conflict and following recovery of output/export from Kirkuk should be considered as well. As the events in the north of Iraq became the key trigger for the oil price growth in October, the settlement of conflict may lead to corrections in the market. Besides, there may be another negative influence upon crude oil quotes from updated forecasts on oil consumption released on November 14 by the International Energy Agency. As it follows from the forecasts, oil consumption growth may fall by 100 thousand BPD in 2017 and 2018 – to 1.5 million BPD and 1.3 million BPD respectively.  

Oil rises – ruble falls? No surprise here!

In the last month, as oil showed a steep rise, the Russian currency rate raised perplexity among many observers. As it follows from the chart bellow (source: Yahoo Finance), between October 10 and November 14, Brent futures for January grew by more than 17.2%, whereas the ruble fell by 4.85%.

At the same time, the dynamics brought no surprise for the IFC clients and investors, as for the first time we had announced in the February economic review that

(https://internationalfinancialcommunity.com/1517-february-2017)

In the March economic review, we wrote that

(https://internationalfinancialcommunity.com/1531-march-2017)

Thus, the Russian ruble current dynamics is a direct reflection of economic and political processes we mentioned earlier. However, oil price growth was just

(https://internationalfinancialcommunity.com/1607-september-2017)

It also should be mentioned that the U.S. Department of the Treasury will have released a report on expending sanctions to Russia’s national debt by early January. If the U.S. impose sanctions on the national debt market, it may trigger quite hard consequences for the ruble exchange rate and the entire Russian economy. As it was mentioned in the previous economic review

(https://internationalfinancialcommunity.com/1607-september-2017)

EURUSD: Markets wait for clarity in terms of U.S. tax reform

The EURUSD currency pair also showed strong price movements in the last month. Thus, in late October 2017, the euro exchange rate steeply plummeted against the U.S. dollar, as Mario Draghi, the Head of the European Central Bank made a sudden statement regarding a possible reduction in bond-purchasing on the balance. The Catalan independence referendum exercised more pressure on the euro, as well as the released U.S. GDP report, which showed the growth surpassing market expectations.

However, on November 9, the euro exchange rate started recovery against the U.S. dollar, regaining much of late October’s loss as of November 14. Still, it was November 14 when the euro saw its main increase against the dollar, as Germany released a report on its GDP growth for the third quarter 2017, which surpassed expectations of analysts. The dollar also gets pressure from the Republicans’ loss in Virginia and New Jersey’s gubernatorial races, as it underlines non-popularity of the current President along with uncertainty caused by the Congress decision-making regarding Trump's tax reform, which, in our opinion, will be a great influence on the EURUSD further dynamics. At the same time, as we mentioned it in the previous economic review, in our opinion, the euro has exhausted its capacity to grow, whereas the U.S. dollar falling against the Common European Currency in the mid-November most probably was just a correction to the existing trend.

Next month is likely to be very rich in terms of information: escalating geopolitical tension (in particular, between the USA/Saudi Arabia and Iran); the U.S. Federal Reserve System meeting scheduled for December 14 with market expectations of a following rate rise; uncertainty whether the U.S. Congress will pass of reject Trump’s tax reform; unclear situation with a possible future agreement about the OPEC+ oil output cuts on the threshold of its countries meeting in Vienna, etc. 

There is a prospect of a quite turbulent and highly volatile period. A period, which demands market participants to make rapid investment decisions based on a deep and accurate analysis, i.e. those competences, which have always been strong sides of the International Financial Community team.

Respectfully yours,

IFC team