Monday, January 28, 2013

Puts n’ calls, Russia ‘peaking’ & Peking’s shale

Oil market volatility continues unabated indicative of the barmy nature of the world we live in. On January 25, the Brent forward month futures contract spiked above US$113. If the day's intraday price of US$113.46 is used as a cut-off point, then it has risen by 4.3% since Christmas Eve. If you ask what has changed in a month? Well not much! The Algerian terror strike, despite the tragic nature of events, does not fundamentally alter the geopolitical risk premium for 2013.

In fact, many commentators think the risk premium remains broadly neutral and hinged on the question whether or not Iran flares-up. So is a US$113-plus Brent price merited? Not one jot! If you took such a price-level at face value, then yours would be a hugely optimistic view of the global economy, one that it does not merit on the basis of economic survey data.
 
In an interesting note, Ole Hansen, Head of Commodity Strategy at Saxo Bank, gently nudges observers in the direction of examining the put/call ratio. For those who don’t know, in layman terms the ratio measures mass psychology amongst market participants. It is the trading volume of put options divided by the trading volume of call options. (See graph above courtesy of Saxo Bank. Click image to enlarge)
 
When the ratio is relatively high, this means the trading community or shall we say the majority in the trading community expect bearish trends. When the ratio is relatively low, they’re heading-up a bullish path.
 
Hansen observes: “The most popular traded strikes over the five trading days (to January 23) are evenly split between puts and calls. The most traded has been the June 13 Call strike 115 (last US$ 3.13 per barrel), April 13 Call 120 (US$0.61), April 13 Put 100 (US$0.56) and June 13 Put 95 (US$1.32). The hedging of a potential geopolitical spike has been seen through the buying of June 13 Call 130, last traded at US$0.54/barrel.”
 
The Oilholic feels it is prudent to point out that tracking the weekly volume of market puts and calls is a method of gauging the sentiments of majority of traders. Overall, the market can, in the right circumstances, prove a majority of traders wrong. So let’s see how things unfold. Meanwhile, the CME Group said on January 24 that the NYMEX March Brent Crude had made it to the next target of US$112.90/113.29 and topped it, but the failure to break this month’s high "signals weakness in the days to come."
 
The  group also announced a record in daily trading volume for its NYMEX Brent futures contract as trading volumes, using January 18 as a cut-off point, jumped to 30,250 contracts; a 38% increase over the previous record of 21,997 set on August 8, 2012.
 
From the crude oil market to the stock market, where ExxonMobil finally got back its position of being the most valuable publicly traded company on January 25! Apple grabbed the top spot in 2011 from ExxonMobil which the latter had held since 2005. Yours truly does not have shares in either company, but on the basis of sheer consistency in corporate performance, overall value as a creator of jobs and a general contribution to the global economy, one would vote for the oil giant any day over an electronic gadgets manufacturer (Sorry, Apple fans if you feel the Oilholic is oversimplifying the argument).
 
Switching tack to the macro picture, Fitch Ratings says Russian oil production will probably peak in the next few years as gains from new oilfields are offset by falling output from brownfield sites. In a statement on January 22, the ratings agency said production gains that Russia achieved over the last decade were mainly driven by intensive application of new technology, in particular horizontal drilling and hydraulic fracturing applied to Western Siberian brownfields on a massive scale.
 
"This allowed oil companies to tap previously unreachable reservoirs and dramatically reverse declining production rates at these fields, some of which have been producing oil for several decades. In addition, Russia saw successful launches of several new production areas, including Rosneft's large Eastern Siberian Vankor field in 2009," Fitch notes.
 
However, Fitch says the biggest potential gains from new technology have now been mostly achieved. The latest production figures from the Russian Ministry of Energy show that total crude oil production in the country increased by 1.3% in 2012 to 518 million tons. Russian refinery volumes increased by 4.5% to 266 million tons while exports dropped by 1% to 239 million tons. Russian oil production has increased rapidly from a low of 303 million tons in 1996.
 
"Greenfields are located in inhospitable and remote places and projects therefore require large amounts of capital. We believe oil prices would need to remain above US$100 per barrel and the Russian government would need to provide tax incentives for oil companies to invest in additional Eastern Siberian production," Fitch says.
 
A notable exception is the Caspian Sea shelf where Lukoil, Russia’s second largest oil company, is progressing with its exploration and production programme. The ratings agency does see potential for more joint ventures between Russian and international oil companies in exploring the Russian continental shelf. No doubt, the needs must paradigm, which is very visible elsewhere in the ‘crude’ world, is applicable to the Russians as well.
 
On the very same day as Fitch raised the possibility of Russian production peaking, Peking announced a massive capital spending drive towards shale exploration. Reuters reported that China intends to start its own shale gale as the country’s Ministry of Land and Resources issued exploration rights for 19 shale prospection blocks to 16 firms. Local media suggests most of the exploration rights pertain to shale gas exploration with the 16 firms pledging US$2 billion towards the move.

On the subject of shale and before the news arrived from China, IHS Vice Chairman Daniel Yergin told the World Economic Forum  in Davos that major unconventional opportunities are being identified around the world. "Our research indicates that the shale resource base in China may be larger than in the USA, and we note prospects elsewhere," he added.
 
However, both the Oilholic and the industry veteran and founder of IHS CERA agree that the circumstances which led to and promoted the development of unconventional sources in the USA differ in important aspects from other parts of the world.

“It is still very early days and we believe that it will take several years before significant amounts of unconventional oil and gas begin to appear in other regions,” Yergin said. In fact, the US is benefitting in more ways than one if IHS’ new report Energy and the New Global Industrial Landscape: A Tectonic Shift is to be believed.

In it, IHS forecasts that the "direct, indirect and induced effects" of the surge in nonconventional oil and gas extraction have already added 1.7 million jobs to the US jobs market with 3 million expected by 2020. Furthermore, the surge has also added US$62 billion to federal and state government coffers in 2012 with US$111 billion expected by 2020. (See bar chart above courtesy of IHS. Click image to enlarge)
 
IHS also predicts that non-OPEC supply growth in 2013 will be 1.1 million barrels per day – larger than the growth in global demand – which has happened only four times since 1986. Leading this non-OPEC growth is indeed the surge in unconventional oil in the USA. The report does warn, however, that increases in non-OPEC supply elsewhere in the world could be subject to what has proved to be a recurrent “history of disappointment.”
 
That’s all for the moment folks! Keep reading, keep it ‘crude’!
 
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© Gaurav Sharma 2013. Graph: Brent Crude – Put/Call ratio © Saxo Bank, Photo: Russian jerry pump jacks © Lukoil, Bar Chart: US jobs growth projection in the unconventional oil & gas sector © IHS 2013.

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