Tuesday, May 27, 2014

Brent’s spike: Bring on that risk premium

Last week, the Brent forward-month futures contract was within touching distance of capping an 11-week high. On May 22, we saw the new July contract touch an intraday level of US$110.58; the highest since March 3. In fact, Brent, WTI as well as the OPEC crude basket prices are currently in 'three figure territory'.

Libyan geopolitical premium that's already priced in, is being supported by the Ukraine situation, and relatively positive PMI data coming out of China. Of these, if the latter is sustained, the Brent price spike instead of being a one-off would lend weight to a new support level. However, the Oilholic is not alone in the City in opining that one set of PMI data from China is not reason enough for upward revisions to the country's demand forecasts.

As for the traders' mindset the week before the recent melee, ICE's Commitments of Traders report for week of May 20 points to a significant amount of Brent buying as long positions were added while short positions were cut, leaving the net equation up by 15% on the week at 200,876. That's a mere 31,000 below the record from August 2013.

Away from crude pricing, S&P Capital IQ reckons private equity acquisitions in both the energy and utilities sectors are "poised for a comeback".

Its research indicates that to date this year, the value of global leveraged buyouts in the combined energy and utilities sectors is approaching $16 billion. The figure exceeds 2013's full-year total of $10 billion. Extrapolating current year energy and utility LBO deal value, 2014 is on pace for the biggest year for such deals since 2007, S&P Capital IQ adds (see table on left, click to enlarge).

Meanwhile, in its verdict on the Russo-Chinese 30-year natural gas supply contract, Fitch Ratings notes that Gazprom can go ahead with exporting eastwards without denting European exports. But since we are talking of 38 billion cubic metres (cm) of natural gas per annum from Gazprom to CNPC, many, including this blogger, have suggested the Kremlin is hedging its bets.

After all, the figure amounts to a quarter of the company's delivery quota to Europe. However, Fitch Ratings views it is as a case of Gazprom expanding its client portfolio, and for a company with vast untapped reserves in eastern Russia its basically good news.

In a recent note to clients, the ratings agency said: "Gazprom's challenge historically has been to find ways to monetise its 23 trillion cm reserves at acceptable prices – and the best scenario for the company is an increase in production. The deal is therefore positive for the company's medium to long term prospects, especially if it opens the door for a further deal to sell gas from its developed western fields to China in due course."

While pricing was not revealed, most industry observers put it at or above $350 per thousand cm. This is only marginally lower than Gazprom's 2013 contract price with its Western European customers penned at $378 per thousand cm. As for upfront investment, President Vladimir Putin announced a capital expenditure drive of $55 billion to boot. That should be enough to be getting on with it.

Just before one takes your leave, here's an interesting Reuters report by Catherine Ngai on why the 'sleepy market' for WTI delivery close to East Houston's refineries is (finally) beginning to wake up. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Table: Global LBOs in the energy & utilities sector © S&P Capital IQ, May 2014.

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