Monday, October 24, 2011

North Sea, Gaddafi, CFTC (Rhymes not intended)

The past week has been cruder than ever, loads to talk about – not least a bit of good news from the North Sea for a change. Following BP’s earlier announcement on its commitment to offshore west of the Shetland Islands to the tune of £4.5 billion, Statoil recently doubled the estimate of the size of its crude find in the North Sea.

The Norwegian energy major now says the Aldous Major South field, a prospection zone linked to the Avaldsnes field operated by Swedish firm Lundin Petroleum, could contain between 900 million and 1.5 billion barrels of recoverable oil.

While the find is perhaps one of the largest ever discoveries in the North Sea, what is of much more significance is the fact that much of extraction zone is in relatively shallower waters. Admittedly, the find and BP’s move are unlikely to increase British production levels to pre-peak (1999) levels. Nonetheless it is welcome news for a prospection zone, the British end of which has been bemoaning higher taxation and where the only overall bonanza independent observers sometimes see is the one related to decommissioning. (Not that, that’s over.)

From the North Sea to Col. Moammar Gaddafi – whose gory end had a near negligible impact on crude oil futures according to evaluations conducted by several City analysts. The former Libyan dictator was killed by revolutionary forces in his hometown of Sirte last Thursday. Most analysts felt focus had already shifted, following the fall of Tripoli, to restoring Libyan production. In fact damaged oil terminals, already factored in to the pricing strategy and supply/demand permutations, were more of a concern than the Colonel’s demise. As Libya moves forward, what sort of government takes shape remains to be seen.

Continuing with pricing, the ICE Brent forward month futures contract could not hold on to early gains last week and stayed below the US$110 level, but the WTI had a mini rally ending the week above US$87. Today in intraday trading Brent’s flirtation with the US$110 level and WTI’s with US$88 continues with all eyes on the outcome of the EU leaders’ summit on October 26th.

Analysts at Sucden Financial Research, expect some further consolidation in the oil market ahead of the meeting. “Thus, volume might be muted while high volatility and nervous trading are possible to dominate the markets. In the meantime, currencies movements will remain the key driver of oil direction, while it will be interesting to watch how the global equity markets will digest any breaking news,” they wrote in an investment note.

Moving away from pricing but on a related note, the Oilholic found time this weekend to read documents relating to the US Commodity Futures Trading Commission’s (CFTC) 20th open meeting on the Dodd-Frank regulations which approved, on October 18th, amongst other things, the final rule on speculative position limits.

To begin with the Oilholic, along with fellow kindred souls in the world of commodities analysis, wonders how a move designated to impose curbs on ‘excessive speculation’ does not actually define it or explains what constitutes admission to the category of ‘excessive speculation.’

The final ruling, according to the CFTC, will establish ground rules for trading 28 ‘core’ commodity futures contracts and also ‘economically equivalent’ futures, options and swaps. The limits are going to be introduced in two phases.

Wait a minute, it gets ‘better’ – limits for ‘spot-month’ will be introduced after the agency further defines what a ‘swap’ contract is (eh???). It seems there is no strict timeline for that definition to come about but the world’s press has been informed that the definition should come before the end of the year. The trading of four energy contracts will be affected – i.e. NYMEX Henry Hub Natural Gas, NYMEX Light Sweet Crude Oil, NYMEX New York Harbor Gasoline Blendstock and NYMEX New York Harbor Heating Oil.

Michael Haigh, analyst at Société Générale CIB notes, “In the short run therefore these rules might not impact price volatility (they still have to define a swap) and we believe the rules will not decrease volatility or stop commodity price spikes down the road. Increased volatility and price spikes are actually more likely in our opinion. The rules will also create a better paper-trail for the CFTC knowing who is holding what and in which market (swap or futures) but legal challenges to the rule are considered likely.”

As for the nitty-gritty, the initial spot month limits will be the CFTC's legacy limits for agricultural commodities (e.g., 600 contracts for corn, wheat and soybeans, 720 for soybean meal and 540 for soybean oil). For other commodities, exchange limits will be applied. Thereafter, spot limits will be based on 25% of the deliverable supply as determined by the exchanges and these will be adjusted every other year for agricultural contracts but each year for metals and energy.

In the second phase, the CFTC will set limits for positions in non-spot contracts (and all months combined) based on open interest. The CFTC should have that data by August 2012. In practical terms, it appears that the all months combined/single month limits will therefore take effect in late 2012 or early 2013 after the CFTC reviews the data, comes up with limits and imposes them.

The CFTC promises to conduct a study 12 months after implementation and would ‘promptly’ address any problems. However, Haigh notes that by all logical reasoning, the study would be at least one year after full implementation, so sometime in 2014. “A reversal of rules would obviously come much later. By then, the damage may have already been done and the markets would have seen even wider gyrations in prices with the removal of liquidity,” he concludes.

Rounding things up, ABN-AMRO – the ‘once’ troubled Dutch bank is attempting to ‘re-establish’ its international presence to energy, commodities and transportation clients according to a communiqué issued from Amsterdam this morning. To this effect, a new office was opened in Dallas staffed by a 'highly regarded' energy banking team swiped from UBS. More offices are to follow in Moscow and Shanghai over the coming year on top of an existing network of 10 international offices. Lets see how the reboot goes!

© Gaurav Sharma 2011. Photo: North Sea oil rig © Cairn Energy Plc

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