Showing posts with label Louisiana Light Sweet. Show all posts
Showing posts with label Louisiana Light Sweet. Show all posts

Thursday, May 22, 2014

A Russian deal, an Indian election, Libya & more

While the Europeans are busy squabbling about how to diversify their natural gas supplies and reduce reliance on Russia, the country's President Vladimir Putin hedged his bets earlier this week and reacted smartly by inking a 30-year supply deal with China.

No financial details were revealed and the two sides have been haggling over price for better parts of the last decade. However, yet again the Russian president has proved more astute than the duds in Brussels! Nevertheless, the Oilholic feels Russia would have had to make substantial compromises on price levels. By default, the Ukraine standoff has undoubtedly benefitted China National Petroleum Corp (CNPC), and Gazprom has a new gas hungry export destination.

Still there is some good news for the Europeans. Moody's believes that unlike in 2008-09, when gas prices spiked in the middle of the winter due to the cessation of Russian gas supplies to Europe via Ukraine, any temporary disruption via Ukraine would have only have a muted impact.

"This opinion factors in a combination of (1) lower reliance on Ukraine as a transit route, owing to alternative supply channels such as the Nord Stream pipeline which became operational in 2011; (2) low seasonal demand in Europe as winter has come to an end; and (3) gas inventories at high levels covering a full month of consumption," the ratings agency noted in a recent investment note.

Meanwhile, a political tsunami in India swept the country's Congress party led government out of power putting an end to years of fractious and economic stunting coalition politics in favour of a right-wing nationalist BJP government. The party's leader Narendra Modi delivered a thumping majority, which would give him the mandate to revive the country's economic fortunes without bothering to accommodate silly whims of coalition partners.

Modi was the chief minister of Gujarat, one of the country's most prosperous provinces and home to the largest in the refinery in the world in the shape of Jamnagar. In many analysts' eyes, regardless of his politics, the Prime Minister elect is a business friendly face.

Moody's analyst Vikas Halan expects that the new BJP-led government will increase natural gas prices, which would benefit upstream oil & gas companies and provide greater long term incentives for investment. Gas prices were originally scheduled to almost double in April, but the previous government put that increase on hold because of the elections.

This delay has meant that India's upstream companies have been losing large amounts of revenue, and a timely increase in gas prices would therefore cushion revenues and help revive interest in offshore exploration.

"A strong majority government would also increase the likelihood of structural reform in India's ailing power sector. Closer co-ordination between the central and state governments on clearances for mega projects and land use, two proposals outlined in the BJP's manifesto, would address investment delays," Halan added.

The Oilholic agrees with Moody's interpretation of the impact of BJP's victory, and with majority of the Indian masses who gave the Congress party a right royal kick. However, one is sad to see an end to the political career of Dr Manmohan Singh, a good man surrounded by rotten eggheads.

Over a distinguished career, Singh served as the governor of the Reserve Bank of India, and latterly as the country's finance minister credited with liberalising and opening up of the economy. From winning the Adam Smith Prize as a Cambridge University man, to finding his place in Time magazine's 100 most influential people in the world, Singh – whose signature appears on an older series of Indian banknotes (see right) – has always been, and will always be held in high regard.

Still seeing this sad end to a glittering career, almost makes yours truly wish Dr Singh had never entered the murky world of mainstream Indian politics in the first place. Also proves another point, that almost all political careers end in tears.

Away from Indian politics, Libyan oilfields of El Sharara, El Feel and Wafa, having a potential output level 500,000 barrels per day, are pumping out the crude stuff once again. However, this blogger is nonplussed because (a) not sure how long this will last before the next flare up and (b) unless Ras Lanuf and Sidra ports see a complete normalisation of crude exports, the market would remain sceptical. We're a long way away from the latter.

A day after the Libyan news emerged on May 14, the Brent forward month futures contract for June due for expiry the next day actually extended gains for a second day to settle 95 cents higher at US$110.19 a barrel, its highest settlement since April 24.

The July Brent contract, which became the forward-month contract on May 16, rose 77 cents to settle at US$109.31 a barrel. That's market scepticism for you right there? Let's face it; we have to contend with the Libyan risk remaining priced in for some time yet.

Just before taking your leave, a couple of very interesting articles to flag-up for you all. First off, here is Alan R. Elliott's brilliant piece in the Investor’s Business Daily comparing and contrasting fortunes of the WTI versus the LLS (Louisiana Light Sweet), and the whole waterborne crude pricing contrast Stateside.

Secondly, Claudia Cattaneo, a business columnist at The National Post, writes about UK political figures' recent visit to Canada and notes that if the Americans aren't increasing their take-up of Canada's energy resources, the British 'maybe' coming. Indeed, watch this space. That's all for the moment folks! Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com 


© Gaurav Sharma 2014. Photo: Pipeline, India © Cairn Energy

Friday, September 20, 2013

Crude prices: Syrian conundrum & bearish trends

As the immediate threat of a US-led campaign against Syria recedes, some semblance of decidedly bearish calm has returned to the oil markets. The last two weeks have seen steady declines in benchmark prices as the Assad regime agreed to a Russian-led initiative aimed at opening up the Syrian chemical weapons arsenal to international inspection. Jury is still out on whether it will work, but that’s enough to keep the oil market bulls in check.
 
Supply-side analysts also took comfort from the improving situation in terms of Libyan production. However, an appreciable caveat needs to be taken into account here. Libya’s oil production has recovered, but only to about 40% of its pre-war rate of 1.6 million barrels per day (bpd), and is currently averaging no more than 620,000 bpd, according to the government.
 
A further lull in violence in Egypt has helped calm markets as well. Much of the market fear in this context, as the Oilholic noted from Oman a few weeks ago, was invariably linked to the potential for disruption to tanker traffic through the Suez Canal which sees 800,000 barrels of crude and 1.5 million barrels of petroleum distillate products pass each day through its narrow confines.
 
Furthermore, it wasn’t just the traffic between the Red Sea and the Mediterranean Sea via the canal that was, and to a certain extent still is, an area of concern. Disturbances could also impact the Suez-Mediterranean pipeline which ferries through another 1.7 million bpd. Syria, Libya and Egypt aside, Iran is sending conciliatory notes to the US for the first time in years in its nuclear stand-off with the West.
 
Factoring in all of this, the risk premium has retreated. Hence, we are seeing are near six-week lows as far as the Brent forward month futures contract for November goes. There is room for further correction even though winter is around the corner. On a related note, the WTI’s discount to Brent is currently averaging around US$5 per barrel and it still isn’t, and perhaps never will be, sufficiently disconnected from the global geopolitical equation.
 
Shame really, for in what could be construed further price positive news for American consumers, the US domestic crude production rose 1.1% to 7.83 million bpd for the week that ended September 13. That’s the highest since 1989 according to EIA. At least for what it’s worth, this is causing the premium of the Louisiana Light Sweet (LLS) to the WTI to fall; currently near its lowest level since March 2010 (at about $1.15 per barrel).
 
Moving away from pricing matters, the Oilholic recently had the chance to browse through a Fitch Ratings report published last month which seemed to indicate that increasing state control of Russian oil production will make it harder for private companies to compete with State-controlled Rosneft. Many commentators already suspect that.
 
Rosneft's acquisition of TNK-BP earlier this year has given the company a dominant 37% share of total Russian crude production. It implies that the state now controls almost half of the country's crude output and 45% of domestic oil refining.
 
Fitch analyst Dmitri Marinchenko feels rising state control is positive for Rosneft's credit profile but moderately negative for independent oil producers. “The latter will find it harder to compete for new E&P licences, state bank funding and other support,” he adds.
 
In fact, the favouring of state companies for new licences is already evident on the Arctic shelf, where non-state companies are excluded by law. However, most Russian private oil producers have a rather high reserve life, and Marinchenko expects them to remain strong operationally and financially even if their activities are limited to onshore conventional fields.
 
“We also expect domestic competition in the natural gas sector to increase as Novatek and Rosneft take on Gazprom in the market to supply large customers such as utilities and industrial users. These emerging gas suppliers are able to supply gas at lower prices than the fully regulated Gazprom. But this intensified competition should not be a significant blow to Gazprom as it generates most of its profit from exports to Europe, where it has a monopoly.”
 
There is a possibility that this monopoly could be partly lifted due to political pressure from Rosneft and Novatek. But even if this happens, Marinchenko thinks it is highly likely that Gazprom would retain the monopoly on pipeline exports – which would continue to support its credit rating.
 
Continuing with the region, Fitch also said in another report that the production of the first batch of the crude stuff from the Kashagan project earlier this month is positive for Kazakhstan and KazMunayGas. The latter has a 16.8% stake in the project.
 
Eni, a lead member of North Caspian Operating Company, which is developing Kashagan, has said that in the initial 2013-14 phase, output will grow to 180,000 bpd, compared with current output from Kazakh oilfields of 1.6 million bpd. Kashagan has estimated reserves of 35 billion barrels, of which 11 billion barrels are considered as recoverable.
 
The onset of production is one reason Fitch expects Kazakhstan's economic growth rate to recover after a slight slowdown in 2012. Meanwhile, KazMunayGas expects the Kashagan field to make a material contribution to its EBITDA and cash flow from next year, the agency adds.
 
Increased oil exports from Kashagan will also support Kazakhstan's current account surplus, which had been stagnating thanks to lower oil prices. However, Fitch reckons foreign direct investment may decline as the first round of capital investment into the field slows.
 
What's more, China National Petroleum Company became a shareholder in Kashagan with an 8.3% stake earlier this month. Now this should certainly help Kazakhstan increase its oil supplies to China, which are currently constrained by pipeline capacity. Watch this space! That’s all for the moment folks! Keep reading, keep it ‘crude’!
 
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© Gaurav Sharma 2013. Photo: Oil production site, Russia © Lukoil

Monday, April 16, 2012

On Oilfield services co’s & a Texan Goodbye

Last two days have been about chatter on oilfield services and drilling companies at a pan global level based on Houstonian feedback, an interesting editorial and an investment note – all of which suggest that things are stable, growth will occur but that 2012-2013 may not be as good as 2011.

The reason is tied-in to the Oilholic’s last few blog posts that natural gas price is low and crude oil price is relatively high. So gains are to be made on one side of the business and the other side – while not necessarily countering all gains – would still stunt growth to a degree according to those in the know. Furthermore, growing competition within the services and drilling industry also means the biggest companies will still grow over the next 12 months, but not by the 10%-or-higher range that would warrant a continued positive outlook according to Moody’s.

“We foresee lower operating margins and slower EBITDA growth in 2012-2013 for the three companies that offer the best barometer of industry conditions – Schlumberger, Halliburton and Baker Hughes,” says Stuart Miller, Vice President & Senior Analyst at the ratings agency.

“We would move our outlook to positive if we projected that sector’s EBITDA would grow by more than 10% (annualised) over the next 12-18 months, while a drop of more than 10% would translate to a negative outlook,” he concludes.

The US rig count is also expected stabilise in 2012-2013. Oil-directed drilling will continue to outperform, but natural gas drilling will remain depressed into the foreseeable future, leading to a slower upward curve according to the agency.

(Click on graph - above right - to enlarge; for the latest Baker Hughes Rig Count click here). Nonetheless, drilling and associated services in unconventional plays continues as an area of strength for the industry.

The technical difficulty of developing unconventional resources will support a robust demand for sophisticated (also read expensive) horizontal well services. Companies such as Superior Energy Services, Key Energy Services and Basic Energy Services all stand to gain from their increasing exposure to unconventional plays, says Moody’s.

This ties-in nicely to an editorial in the latest (Apr 13, 2012) issue of the Houston Business Journal by Deon Daugherty in which she notes that private equity funding is being pumped in to oilfield services firms as 2012 unfolds alongside the usual investment in other traditional E&P components of the business.

Based on feedback from key local players, Daugherty writes that the technology and technical expertise needed to drill complex horizontal wells, hydraulic fracturing and expensive equipment is partly behind Houston private equity funds pouring investments in to oilfield services companies, alongside a high price of black gold driving investment into traditional E&P activity.

Speaking of editorials, there is another interesting and controversial one in The New Yorker (Apr 9, 2012) which makes a comment on ExxonMobil – the world’s largest “non-state-owned” corporation with annual revenues exceeding the GDP of Norway – and its ties with the US Republican Party.

While Democrats love to loathe the Irving, Texas headquartered IOC, columnist Steve Coll, splendidly notes that ExxonMobil CEO Rex Tillerson and President Obama "appear to share at least one understanding about energy policy and the 2012 (presidential) campaign: they are both aware that the partisan and media-amplified war over where to place the blame for rising (US) gasoline prices is largely a phony one."

The Oilholic couldn’t have put it better himself that being an E&P behemoth and that in itself being the area where its core interests are, "ExxonMobil can neither control prices at the pump nor make high profits there."

On a related R&M note, a Bloomberg report suggests that Delta Airlines is possibly in talks with ConocoPhillips about purchasing the Houston-based oil and gas major’s Trainer Refinery in Pennsylvania. Citing anonymous sources, the newswire says Delta would use the fuel from the Trainer refinery and other refineries in exchange for other products made there that it would not use.

While ConocoPhillips has said it would close the Trainer facility if it could not find a buyer by the end of May, its spokesman Rich Johnson told Bloomberg it is "still in the process of seeking a buyer for the refinery” and that the process was confidential. If it goes through, the move would be a remarkable one for a privately listed international airline.

Lastly on a crude pricing note, local media outlets suggest Enterprise Product Partners and Enbridge plan to reverse the flow of the Seaway oil pipeline two weeks ahead of schedule by mid-May pending US regulatory approval, thereby starting a much-needed reduction of excess crude from the US Midwest down and dispatch it to the Gulf Coast.

While the crude fetches a premium in the Gulf Coast, high inventory levels at the Cushing, Oklahoma – the delivery point for WTI oil futures contracts – have impacted WTI pricing relative to Brent. Reports suggest a mid-May (May 17) start date for the pipeline flow reversal will initially carry about 150,000 barrels per day of crude from the Midwest to the Gulf Coast. The news had an immediate impact as the arbitrage between transatlantic Brent and Gulf coast crudes on one hand and WTI on the other contracted sharply.

At 18:15 GMT, Light Louisiana Sweet (LLS) traded at US$19.40 a barrel premium over WTI, down US$1.65 from Friday's, Mars Sour (MRS) traded at US$12.25 a barrel over WTI down US$1.75, Poseidon (PSD) traded at US$11.55 over WTI down US$1.55.

Meanwhile, the ICE Brent futures contract for June traded at US$118.60 down US$2.61. Hitherto Brent crude and Gulf Coast crudes were moving up in tandem for the last 18 months, so this is certainly welcome news for those hoping for a return to more traditional levels stateside between WTI and Gulf Coast crudes.

Sadly, it is now time to bid another goodbye to Houston – a city which the Oilholic loves to visit more than any other. Yours truly leaves you with a view of the Minute Maid Park in downtown Houston. It is home to the local baseball team – the Houston Astros.

The stadium has a capacity of 40,963 spectators according to a spokesperson with an electronically retractable roof which was developed by Vahle, courtesy of which it can be fully air-conditioned when required – a wise decision given the city’s often hot and humid weather!

A local enthusiast tells the Oilholic that the field is unofficially and lightheartedly known as "The Field Formerly Known As Enron" by fans, locals, critics and scribes alike, acquiring the title in wake of the Enron scandal, as the failed energy company had bought naming rights to the stadium in 2000 before its spectacular and fraud-ridden collapse in November 2001.

Thankfully, on June 5, 2002, Houston-based Minute Maid, the fruit-juice subsidiary of Coca Cola Company, acquired the naming rights to the stadium for 28 years. Unlike Enron, it’s a healthier brand says the Oilholic. That’s all from Texas folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore/National Geographic. Photo 2: Minute Maid Park - home of the Houston Astros, Texas, USA © Gaurav Sharma 2012. Graph: Land & Offshore rig count and forecast © Baker Hughes/Moody's.

Friday, October 07, 2011

Brent-WTI price divergence, OPEC & Eni

Since Q1 2009, Brent has been trading at premium to the WTI. This divergence has stood in recent weeks as both global benchmarks plummeted in wake of the recent economic malaise. WTI’s discount reached almost US$26 per barrel at one point. Furthermore, waterborne crudes have also been following the general direction of Brent’s price. The Louisiana Light Sweet (LLS) increasingly takes its cue from Brent rather than the WTI, and has been for a while. Its premium to WTI stood at US$26.75 in intraday on Wednesday.

The fact that Brent is more indicative of the global economic climate has gone beyond conjecture. OPEC has its own basket of crudes to look at, but got spooked on Wednesday as Brent dipped below the US$100 mark, albeit briefly and WTI came quite close to settling below US$75.50.

Iraq’s Deputy Prime Minister for energy, Hussain al-Shahristani, said that there was “no need” for the cartel to review its oil output at the next OPEC meeting (on December 14th in Vienna), but stopped shy of calling for a cut in oil production. Nonetheless, al-Shahristani did say that it would be “difficult” for his country to accept crude prices below the US$90 mark.

There also appears to be little appetite within the cartel to hold an emergency meeting and the Oilholic sees the chances of that happening being quite remote. If the oil price continues to slide, then it would be a different matter but quite simply a correction rather than a freefall would be the order of the day. On Thursday morning prices rose, aided by a weaker US Dollar, the US Fed’s indication of implementing further stimulus measures and the Bank of England’s move to initiate £75 billion worth of quantitative easing.

Sucden Financial research notes that after Tuesday’s bullish reversal, crude oil saw mixed trading early Wednesday as private reports about the US employment situation were mixed. Some optimism regarding more willingness to strike some solutions for the European debt issues seemed to underpin some trading as the euro generally maintained its gains.

“Technically, WTI futures may still have vulnerability toward the US$74 area but the recent gains have set technical potential for gains which could test toward US$83 area. Brent futures have technical patterns that may suggest tests of strength toward the area of US$106; supports may be expected near US$100 and US$95 areas,” Sucden notes further.

Whichever way you look at it, OPEC heavyweights led by Saudi Arabia, while not averse to cuts, have no appetite for an emergency meeting of the cartel as December is not that far away. Rounding things off, following Italy’s rating downgrade, it came as no surprise that debt ratings of Italian government-related issuers (GRIs) would be impacted, as Moody’s responded by downgrading the long term senior unsecured ratings of Italian energy firm Eni and its guaranteed subsidiaries to A1 from Aa3 and the senior unsecured rating of Eni USA Inc. to A2 from A1. The Prime-1 rating is unchanged.

Approximately €13.1 billion of long-term debt securities would be affected and the outlook for all ratings is negative. However, Moody’s notes that in the context of weakened sovereign creditworthiness, the likelihood of Eni receiving extraordinary support from the Italian government has significantly diminished.

Moody's has consequently removed the one-notch ratings uplift that had previously been incorporated into Eni's rating. It also added that Eni's A1 rating continues to reflect the group's solid business position as one of Europe's largest oil & gas companies.

“The group displays a sizeable portfolio of upstream assets that has been enhanced in recent years by a string of acquisitions. Looking ahead, the planned development of Eni's attractive pipeline of large-scale projects should help underpin its reserve base and production profile,” the agency concludes.

Eni, which is also Libya’s biggest producer, resumed production in the country for the first time since the uprising against Col. Moamar Gaddafi’s regime. A company source says it may begin exporting Libyan crude by the end of October or earlier.

© Gaurav Sharma 2011. Photo: Oil Drill Pump, North Dakota, USA © Phil Schermeister / National Geographic