Monday, May 31, 2010

Is Brent Winning Battle of the Indices?

Is London’s Brent Crude winning the battle of the indices? David Peniket, President and Chief Operating Officer of Intercontinental Exchange (ICE) Futures Europe, certainly seems to think so.

Speaking at the Reuters Global World Energy Summit on May 27th, Peniket said, “Brent is the global oil benchmark. Brent is used as the price benchmark for around two-thirds of the world's traded oil. It reflects the fundamentals of the oil market on a global basis and we're seeing Brent used as part of the pricing for oil throughout the world.”

Looking ahead, he added that based on “ongoing” growth in Asia, ICE currently expects Asian market participants to use Brent to hedge their risk rather than other benchmarks.

WTI Volumes traded on the NYMEX are far higher than those of Brent on ICE but Peniket said that from 2008 to 2009 Brent grew by 8% in volume terms while WTI grew 2%. Over Q1 2010, Brent grew by 34% while NYMEX WTI grew by 8%.

He declined comment on when he thought ICE Brent volumes may exceed WTI on NYMEX but said that, “Brent is a seaborne crude; it's at a point of the world where crude oil can move around and it can act as a point of arbitrage between different crude grades. Clearly WTI is an important US benchmark but I don't think it reflects the fundamentals of the global oil market in the way that Brent reflects them.”

Elsewhere in the summit, Reuters reported that top bosses of several leading commodities exchange, including Peniket, expressed their common view that speculation has not caused extreme volatility in oil prices and the efforts by state regulators in various markets are unwise to say the least. That will hardly convince politicians seeking capital and a largely sceptical wider public opinion, most notably in the US.

© Gaurav Sharma 2010. Photo Courtesy © Royal Dutch Shell

Sunday, May 30, 2010

The Crude Month of May!

The month of May was an extraordinary one for those following crude price fluctuations. Cumulatively speaking, both the major oil futures markets saw the oil price tumble by nearly a fifth since April 30. Over the last fortnight, the price of oil closed below US$70 a barrel for the first time in 2010 driven down by the Greek debt crisis as well as US inventory build-up.

However, between May 26 and 28, the market witnessed a spectacular rebound when the NYMEX contract for July spiked nearly $7 a barrel. Hence, the weekly rise on the back of a healthy 48 hours came in at 5.6% or $3.93 a barrel. Impressive as it may appear, several market commentators I spoke to on the day seemed reluctant to rule out fresh lows over the course of next week (and well into June).

There’s plenty to spook the markets – Greece debt crisis, the Euro’s woes as a result of it, Spain’s recent debt ratings downgrade and US consumer spending. Brent’s premium to NYMEX, which was markedly visible mid-May, also disappeared by Friday.

Predictably, near-term futures contracts are trading at a discount to more-distant contracts. Prices for the most actively traded NYMEX futures contract fell 14.1% or $12.18 in May, the worst month on record since December 2008. Concurrently, over the same period, the front-month Brent crude contract fell 15.4% or $13.42 a barrel, the highest monthly decline since November 2008.

Overall, May was a tough old month for energy futures in general, with perhaps the notable exception of Natural Gas. Expect more of the same in June.

© Gaurav Sharma 2010. Chart Courtesy © Digital Look/BBC

Saturday, May 15, 2010

To Drill or Not to Drill Mr. President?

One cannot but help feeling for President Barack Obama. As a candidate and Democrat nominee for the highest American office, Obama was often sceptical about offshore drilling. While his opponents were screaming “Drill Baby Drill,” the then young senator from Illinois was not convinced for his own reasons – some sound, others well – not all that sound.

As President, facing the ground realities and very real concerns about US energy security, Obama made the correct call on March 31 to permit offshore drilling off the US coastline. His opponents claimed the President was not going far enough. Some on his own side claimed he was pandering to the Republicans.

Sadly, before the dust could settle, on April 20th, an environmentally tragic oil spill in the Gulf of Mexico that followed an explosion on an offshore rig, complicated the scenario further. More so executives, from both - oil giant BP which commissioned the rig and Transocean, one of the world’s largest offshore drilling companies, and the rig's operator - did not acquit themselves well in front of American legislators by trying to shift the blame for the incident.

As both companies were trying their hardest to ensure that they do not endear themselves to the American public, the President summed up the emotions, “The American people could not have been impressed with that display, and I certainly wasn’t...There’s enough responsibility to go around, and all parties should be willing to accept it. That includes, by the way, the federal government.”

Trouble is, even though he says oil exploration and drilling must still be part of US energy strategy, the issue has become more political than ever. Following the spill, Obama announced a moratorium on new offshore drilling projects unless rigs have new safeguards to prevent another disaster.

Governor of California Arnold Schwarzenegger said the accident had caused him to drop his support for new offshore drilling in his state. "You turn on the television and see this enormous disaster. You say to yourself, 'Why would we want to take on that kind of risk?” he added.

Across the political divide politicians are asking the very same questions, albeit not for the same reasons. Let us take things into perspective. No one, not least the author of this blog, or people within or outside the oil world including BP (who may have to foot most if not all of the bill to clean up the mess), are suggesting for a moment that what has happened is not terrible and tragic in equal measure.

However, the spill will make it harder for America to follow an energy policy that could actually deliver long-term satisfaction. Some in political circles would try their best to pander to the voting public’s fears for their own gains. Here is a telling fact - before the latest oil spill began on April 20th; the last “big” oil platform leak in the US was 40 years ago. Exxon Valdez incident, though related, cannot be brought into the equation.

So, while any such incident is regrettable to say the least, the figure not only speaks for itself but also indicates that safety standards have improved markedly. However, the figure is something the politicians risk even raising, let alone rely upon to justify offshore drilling and the list does include the President. The oil spill, will be contained and hopefully soon, but US energy policy is currently in a mess and all at sea. Actually it could be both and that in itself is no laughing matter.

© Gaurav Sharma 2010. Photo Courtesy © The White House website