Thursday, December 31, 2009

Crude Year ’09 Ends Just Like the Last One

When 2008 was coming to an end, the price of crude oil was stuck below half its record peak price of US$147 a barrel seen in July that year. Yet fears about a new spike persisted despite a dire global economy. As the curtain falls on 2009, with the price of crude futures hovering around $80, market commentators have voiced similar concerns. Most of the reasoning banks on sound conjecture that oil consumption in India and China is rising beyond expectation and that OECD economies are also witnessing an economic recovery of sorts after facing negative growth for much of 2009.

The year saw some memorable as well as predictable developments. As the price of oil weakened so did the black gold weighted currencies, most notably the Russian Rouble. OPEC continued to maintain production levels at its March meeting, resisting temptation to cut production in wake of falling prices. It ended the year with a production level of 24.84 million barrels per day (bpd), excluding Iraq's output. On the M&A front, Suncor and Petro Canada announced a CAD$ 19.3 billion (US$ 15.3 billion) merger. ExxonMobil topped the Fortune 500 Index, dethroning Walmart as USA’s biggest company. The Texas-based oil giant, according to published sources, employed 79,000 people and produced 3% of global oil as of April 2009. It was followed closely behind by Chevron in third place and ConocoPhillips in fourth, highlighting the dominance of energy companies in the U.S. corporate world.

Clamour for biofuels grew, along with arguments for and against them and new methods of production. One of the most unique theories came from three researchers at the University of Nevada (Reno, U.S.A.) whose research was carried by a number of media outlets in 2009. Lead by Dr Manoranjan Misra, they found that coffee grounds can yield 10-15% of biodiesel by weight. However, so far there are no indications that Starbucks would enter the oil trade.

Perhaps still haunted by the fact they sold minerals rich Alaska to the U.S.A. in 1867 for two cents an acre, the Russian government launched fresh and detailed territorial claims within the Arctic Circle determined not to miss out on a perceived oil bonanza in the region. Despite extracting oil from seabed being mighty awkward, Canada, Denmark, Iceland, Norway and U.S.A. also made their respective claims beyond agreed international borders (to be heard at a later date).

Nigeria’s maritime troubles related to oil, dogged production for most parts of the year. The militant group curiously named MEND (Movement for the Emancipation of the Niger Delta) offered nothing more than temporary respite. While Nigerian production fell, Uganda and Ghana struck oil. Armed with petrodollars, China, Russia, Iran and Venezuela dished out their own respective international versions of how to win friends and influence people noted The Economist.

Major oil firms frowned at the miserly terms offered by Iraq’s government at the first opening of competitive bidding for production rights in July and some seemingly held out for better prices. Iraqis said it was their moral right to protect the country’s wealth. As security is a distant prospect, something has to give way with negotiations and fresh bidding slated for 2010.

Last but not the least, bashing 'speculators' emerged as the most popular way for American and European politicians to spend time when called upon by their electorates and the popular press to explain first high and then low oil prices. Ultimately settling on 'volatile' as an apt description, politicians hailing from no less than 19 developed countries echoed the common message of 'damn the speculators' - some in more colourful language than others.

For most of the motley crew, alternative investors such as exchange traded funds which hold large commodity positions for extended trading durations were behind price volatilities seen in anything traded on earth from gold to garlic, and not just oil. However, a U.S. CFTC study from 2008 seemly exonerated them and the Commission’s new boss Gary Gensler has so far not rejected the validity of its findings.

Maybe for some, it’s rather difficult to palate that ‘speculation’ in itself mirrors supply, demand and global instability premiums. While the latter impacts oil more than most, supply and demand permutations hit traded commodities of all descriptions.

© Gaurav Sharma 2009. Photo Courtesy Cairn Energy PLC

Thursday, December 24, 2009

OPEC’s Decision Hardly a Surprise

At their latest meeting on December 22, 2009, in Luanda (Angola), OPEC ministers did precisely what the market expected them to do, i.e. nothing! Some murmured that OPEC’s inaction in terms of holding output at 24.84 million barrels per day (bpd), excluding Iraq’s output, did cause a brief spike and nothing more.

Nonchalant shrugs from traders and analysts alike suggest that some members would flout their respective agreed quota anyway which seems to be the norm. As usual, containing Saudi Arabia, which accounts for 30% of OPEC’s output, will prove mighty hard for the cartel. Regional estimates on the volume by which the Saudis usually exceed their daily quota, varies from 90k bpd to 200k bpd. However, OPEC insisted it would improve members' compliance with target quotas.

The cartel noted with “great concern” that, whilst the worst of the global recession appears to be over, the world economy remains confronted with the deepest, most wide-spread contraction since the 1940’s.

More importantly, for the first time since early 1980’s, demand for black gold was seen to be in decline for the second year running, according to OPEC. Faced by shrinking global industrial production, low private consumption and high unemployment, the cartel said it would leave oil production levels unchanged for the time being with a review slated for March 17, 2010.

There was also the customary call on non-OPEC producers to cooperate with the cartel to support oil market stabilisation and the restoration of market equilibrium. Status quo it is then.
© Gaurav Sharma 2009. Photo Courtesy Cairn Energy PLC

Tuesday, December 22, 2009

Just Getting Started - Initial Thoughts

Geopolitics and oil are near inseparable. The market for black gold and trading patterns have long fascinated me since my first attempt at commodities reporting with a story on Cairn Energy in 2004 for a weekly newspaper. Several articles, exchanges with traders and analysts, books on the subject and OPEC summits later, I have arrived at a juncture where I feel I ought to pen my thoughts on the subject minus the constraints of third party editorial rules. The oil world, its players, supply and demand permutations, politics and the stuff itself will be the subjects of this blog as I see them in the weeks, months and years to come. I hope to get the ball rolling in earnest from Jan 2010. I have thought long and hard about writing a blog on oil and hope to do justice to it.