An OPEC seminar & an Indian minister

Indian oil minister S. Jaipal Reddy is rather sought after these days. You would be, if you represented one of the biggest consumers of the crude stuff. So it is just about right that OPEC’s 5th international seminar here in Vienna had Reddy speak at a session titled: “Oil and the World Economy.”

In face of growing international pressure to reduce its dependence on Iranian oil and running out of capital market mechanisms to actually pay for the stuff in wake of US/EU sanctions, the Indian minister certainly had a few things to say and wanted to be heard.

India is the world's fourth-largest oil importer with all of its major suppliers being OPEC member nations, viz. - Saudi Arabia, Iraq and Iran. Given what is afoot from a global macroeconomic standpoint, Reddy has called upon oil producing and consuming countries to work together to build trust and share market data to establish demand certainty in international oil markets.

Unsurprisingly, he admitted that in an oil-importing country like India, higher oil prices lead to domestic inflation, increased input costs, an increase in the budget deficit which invariably drives up interest rates and slows down the economic growth.

“There could not be a more direct cause and effect relation than high oil prices retarding economic growth of oil-importing countries,” Reddy said adding that a sustained US$10 per barrel increase in crude prices reduces growth in developing countries by 1.5%.

“We are meeting in difficult times. The Eurozone crisis, the continuing recession in the global economy, rising geopolitical tensions, a sustained phase of high and volatile international oil prices, extraneous factors continuing to influence the price formation of oil – all these pose serious challenges to the health of the global economy and stability of the world’s financial system. The current global financial crisis, which has lasted longer than we thought in 2008, is the greatest threat faced by the global economy since the Great Depression eight decades ago,” he said further.

Reddy revealed that between the Financial Year 2010-11 and 2011-12, India’s annual average cost of imported crude oil increased by US$27 per barrel, making India’s oil import bill rise from US$100 billion to a whopping US$140 billion.

“Furthermore, since we could not pass on the full impact of high international oil prices, we had to shell out subsidies to consumers amounting to US$25 billion dollars...India’s GDP grew at 6.9% during the last financial year down from the 8% plus growth rate experienced in the past few years,” he continued.

India and perhaps many others see themselves distinguishing two schools of thoughts here in Vienna. One school holds that the global economy has built up enough resilience to absorb oil price hikes due to (a) stronger demand from emerging economies and, (b) more enlightened Central Bank policies; the other school is categorical that high oil prices are one of the primary reasons for the weak conditions in the economies of the US and Europe.

“We subscribe to the latter view and hold that very high and volatile oil prices will continue to weaken global efforts for an expeditious recovery from the ongoing global economic recession and financial crisis,” Reddy concluded.

The viewpoint of an importers’ club member is always welcome at an exporting cartel’s event. For good measure, the representatives of Nigeria, Ecuador and Iran provided the exporters’ perspective and IFC’s spokesperson did the balancing act as a sideshow. As for the word “Iran” and the sanctions it faces; the Oilholic has been told in no uncertain terms by quite a few key people that it’s...er...ahem...a taboo subject at this meeting. That's all for the moment folks. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Indian Gas Station © Indian Oil Corporation Ltd.

First vibes from OPEC, monthly data & Mr. Al-Naimi

The Oilholic is in Vienna ahead of the 161st meeting of OPEC ministers and the 5th OPEC International seminar; the latter being a forum where the great and good of this crude world interact with OPEC ministers and other invited dignitaries once every two years. However, even before the proceedings have begun, the cartel’s Monthly Market Report has stirred things up.

Back dated figures for April suggest, OPEC’s production for the month came in 32.964 million barrels per day (bpd) up 631,000 bpd from March. The figure for May came in lower at 31.58 million bpd; but still well above the cartel’s production cap of 30 million bpd. Such a high level has not been recorded since 2008 when the price of crude rose to a spectacular high only to fall sharply as the global financial crisis took hold. The data would suggest that together with non-OPEC sources, the market remains well supplied. Furthermore, in the face of economic uncertainty demand could drop as the economies of India and China show signs of medium term cooling.

On the subject of demand, OPEC notes, “The upcoming driving season might be affected by movements in retail gasoline prices and economic developments worldwide; hence, world oil demand would show a further decline and might see a cut of between 0.2 and 0.3 million bpd from the current forecast of the year's total growth (0.9 million)."

With leading benchmarks Brent and WTI falling below US$100 a barrel this week along with the OPEC basket price, some would think the Saudis would be keen to support a cut in the cartel’s production quota. Figures suggest OPEC's largest producer did in fact reduce its output to 9.8 million bpd in May from 10.1 million bpd in April. That is still the highest Saudi production rate on record for the last three years and the country recently reclaimed its top spot from Russia as the world’s largest producer of crude oil.

However, ahead of the OPEC meeting on June 14, the country’s inimitable oil minister Ali al-Naimi has jolted a few by actually calling for an increase in OPEC’s output. In an interview with the Gulf Oil Review (published by Bill Farren-Price’s Petroleum Policy Intelligence), he said, “Our actions have helped the oil price drop from US$128 in March to about $100 today which has acted as a type of stimulus to the European and world economy…Our analysis suggests that we will need a higher ceiling than currently exists."

"Given our large crude oil reserve situation, we certainly want to see a sustained market for crude oil over the long term. This calls for moderation, but on the other hand, with the cost of oil production going up...a reasonable price is required to ensure exploration can continue," he added.

Clearly the Saudis are on a collision course with other cartel members but since his interview al-Naimi has said he is “happy with the way things are”. Read what you will; we’ve been here before and such OPEC chatter is nothing new, except for the ‘stimulus’ hypothesis which has a nice ring to it. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: OPEC Logo on building exterior © Gaurav Sharma 2011.

Crude market’s health & farewell to the Bay Area

It’s nearly time to say goodbye to the Bay Area head north of the border to British Columbia, Canada but not before some crude market conjecture and savouring the view of Alcatraz Island Prison from Fisherman’s Wharf. A local politician told yours truly it would be an ideal home for speculators, at which point the owner of the cafe ‘with a portfolio’ where we were sitting quipped that politicians could join them too! That’s what one loves about the Bay Area – everyone has a jolly frank opinion.

Unfortunately for debaters on the subject of market speculation, Alcatraz (pictured left) often called “The Rock” and once home to the likes of Al Capone and Machin Gun Kelly was decommissioned in 1963 can no longer be home to either speculators or politicians, though it seems quite a few seagulls kind of like it!

Not blaming speculators or politcians and with market trends remaining largely bullish, selected local commentators here, those back home in the City of London and indeed those the Oilholic is about to meet in Vancouver BC are near unanimous in their belief about holding exposure to oil price sensitivity over the next two quarters via a mixed bag of energy stocks, Russian equities, natural resources linked Forex (especially the Australian and Canadian dollar) and last but not the least an “intelligent play” on the futures market.

Nonetheless the second quarter opened on Monday in negative territory as WTI crude oil slid lower to retest the US$102 per barrel area, while Brent has been under pressure trading just above US$122 per barrel level on the ICE. “The European equity markets are also trading lower as risk appetite has been limited,” notes Myrto Sokou, Sucden Financial Research.

Protecting one’s portfolio from short-dated volatility would be a challenge worth embracing and Société Générale recommends “buying (cheap) short-dated volatility to protect portfolios from escalating political risk in Iran.” (Click on benchmarks graph to enlarge)

Mike Wittner, a veteran oil market commentator at Société Générale, remains bullish along with many of his peers and with some justification. OPEC and Saudi spare capacity is already tight, and will soon become even tighter, due to sanctions on Iran, says Wittner, and the already very bullish scenario would continue to be driven by fundamental.

Analysts point to one or more of the following: 

• Compared to three months ago, fears of a very bearish tail risk have subsided to an extent (e.g. Eurozone, US data) and macro environment is gradually turning supportive.
• Concurrently, risks of a very bullish tail risk remain (e.g. war against Iran or the Straits of Hormuz situation).
• OECD crude oil inventory levels are at five year lows.
• OPEC spare capacity is quite low at 1.9 million barrels per day (bpd), of which 1.6 million bpd is in Saudi Arabia alone.
• Ongoing significant non-OPEC supply disruptions in South Sudan, Syria, and Yemen thought to be in the circa of 0.6 million bpd.
• Broad based appetite for risk assets has been strong.
• Low interest rate and high liquidity environment is bullish.

On the economy front, in its latest quarterly Global Economic Outlook (GEO), Fitch Ratings forecasts the economic growth of major advanced economies to remain weak at 1.1% in 2012, followed by modest acceleration to 1.8% in 2013. While the baseline remains a modest recovery, short-term risks to the global economy have eased over the past few months.

Compared with the previous Fitch GEO in December 2011, the agency has only marginally revised its global GDP forecasts. The agency forecasts global growth, based on market exchange rates, at 2.3% for 2012 and 2.9% in 2013, compared with 2.4% and 3.0% previously.

"Fitch expects the eurozone to have the weakest performance among major advanced economies. Real GDP is projected to contract 0.2% in 2012, and grow by only 1.1% in 2013. Sizeable fiscal austerity measures and the more persistent effect of tighter credit conditions on the broader economy remain key obstacles to growth," says Gergely Kiss, Director in Fitch's Sovereign team.

In contrast to problems in Europe, the recovery in the US has gained momentum over past quarters. Growth is supported by the stronger-than-expected improvement in labour market conditions and indicators pointing to strengthening business and household confidence.

In line with the underlying improvement in fundamentals Fitch has upgraded its 2012 US growth forecast to 2.2% from 1.8%, whilst keeping the 2013 forecast unchanged at 2.6%. For Japan and the UK, Fitch forecasts GDP to increase 1.9% and 0.5% respectively for 2012.

Economic growth of the BRIC countries is expected to remain robust over the forecast horizon, at 6.3% in 2012 and 6.6% in 2013, well above MAE or global growth rates. Nevertheless, Brazil in particular, but also China and India slowed during 2011 and China is expected to slow further this year.

While on the subject of economics, Wittner of Société Générale, regards a shutdown of the Strait of Hormuz as a low-probability but high-impact scenario with Brent potentially spiking to US$150-$200. “In such a scenario, the equity markets would correct sharply. As a rule of thumb, a permanent US$10/barrel increase in the oil price would shave around 0.2% from global GDP growth in the first year after the shock,” he concludes.

That’s all for the moment folks! The Oilholic leaves you with a view of driving on Golden Gate Bridge on a sunny day and downtown San Francisco as he dashes off to catch a flight to Vancouver. Yours truly will be examining Canada’s role as a geopolitically stable non-OPEC supplier of crude while there. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Graph: World crude oil benchmarks © Société Générale. Photo 1: Alcatraz Island. Photo 2: Downtown San Francisco. Photo 3: Driving on the Golden Gate Bridge, California, USA. © Gaurav Sharma.

‘Crude’ views from across the pond

The view on the left is that of the Point Reyes Lighthouse, but more on that later. The Oilholic landed in California on Wednesday to begin yet another North American adventure and instantly noted the annoyance in our American cousins’ voices about rising gasoline prices at the pump.

The extent to which the average American is miffed depends on where he/she buys gasoline which is comfortably in excess of US$4 per gallon with regional and national disparities. For instance in Sunnyvale and Santa Clara CA, gasoline is retailing in the region of US$4.19 to US$4.49 per gallon.

However, head to downtown San Francisco and it jumps by at least 10 cents on average and cross the Golden Gate Bridge towards outlying gas stations and it jumps another 15 cents on top of the Bay Area price. In an election year, President Obama does not want his voters to be miffed, especially as Republican opponents are conjuring up uncosted phantasmal visions of prices at the pump of US$2.50 per gallon.

The President’s answer, based on a credible rumour mill and the US media, might involve diving (again) into the US Strategic Petroleum Reserves (SPR). The signs are all there – grumbling American motorists, Obama discussing releasing strategic stockpiles with British PM David Cameron, Iranians issuing threats about closing the Strait of Hormuz and overall bullish trends in crude markets.

For its worth, when Obama dived into the SPR last summer, he had the IEA’s support – something which he does not have at the moment. The Oilholic believes it was a silly idea then and would be a silly idea now. Although it pains one to say so, grumbling American motorists do not constitute a genuine emergency like the Gulf War(s) or Hurricane Katrina (in 2005); there is no supply shock of a catastrophic proportion or shall we say a ‘strategic’ need. North Sea Maintenance work, Sudanese tiffs, Nigeria and minor market jitters do not qualify were it not for an US presidential election year.

Besides, a release of IEA’s strategic pool of reserves collectively did very little to curb the price rise last summer. In its wake, price dropped momentarily but rose back to previous levels in a relatively short period of time. On this occasion driven by Asian consumption, a drive to seek alternative supplies away from Iran by consuming nations and short term supply constriction will do exactly that - were its SPR to be raided again by the US.

In fact, most contacts in financial circles on the West Coast share the Oilholic’s viewpoint; even though the WTI closed lower at US$103.22 a barrel on persistent talk of strategic reserve releases in the US media on Friday. The price also breached support in the US$104.20 to US$103.78 circa. Respite will be temporary; Moody’s raised its price assumptions for benchmarks WTI and Brent for 2012 and 2013, on Wednesday (while lowering assumptions for the benchmark Henry Hub natural gas).

The agency assumes an average WTI price of US$95 per barrel for crude in 2012, and US$90 per barrel in 2013. Brent will rise by US$10 per barrel from the agency’s previous assumption, with average prices of US$105 per barrel in 2012 and US$100 per barrel in 2013. That – says Moody’s – is due to the higher risk of a potential supply squeeze caused by the Iran embargo and continued strong demand from China.

Meanwhile, with customary aplomb in an election year, President Obama, “authorised” the usage of new sanctions on buyers of Iranian oil with punitive actions against those who continue to trade in Iranian crude. In a nutshell, if a country or one of its banks, trading houses or oil companies tries to source oil from the Iranian central bank then, at least in theory, they could face being cut off from the US banking system should they not comply by June 28.

However, following on from a law signed in December, Obama admitted that the US has had to make exceptions to countries like Japan, who have already made moves to cut back on Iranian oil. Some like India and China will find innovative ways to get around the sanctions as the Oilholic blogged from Delhi earlier in the year.

One does find it rather humorous that in order to defend his stance on Iran, Obama said US allies boycotting Iranian oil would not suffer negative consequences because there was "enough" oil in the world market and that he would continue to monitor the global market closely to ensure it could handle a reduction of oil purchases from Iran.

A statement from the White House acknowledged that "a series of production disruptions in South Sudan, Syria, Yemen, Nigeria and the North Sea have removed oil from the market" over Q1 2012. "Nonetheless, there currently appears to be sufficient supply of non-Iranian oil to permit foreign countries to significantly reduce their import of Iranian oil. In fact, many purchasers of Iranian crude oil have already reduced their purchases or announced they are in productive discussions with alternative suppliers," it adds.

Good, then that settles the argument about the need to raid the SPR (or not?). Meanwhile, Moody’s (and others) also reckon the short term scenario is positive for the E&P industry, at least for the next 12-18 months since the global demand for oil that led to a strong price rally for crude and natural gas liquids (NGLs) shows little sign of abating.

In addition, E&P companies could benefit further from heightened geopolitical risk. Moody's crude assumptions hinge on reduced deliveries in Iran beginning mid-summer, when an embargo takes effect, but crude prices could move even higher if Saudi Arabia fails to fill in the supply shortfall. On the flipside, the industry faces some risk from the fragile European economy and could face lower demand if the euro area destabilises in 2012 and 2013.

Meanwhile, back home in the UK, there have been several crude developments. First panic buying ensued when Government issued advice to British motorists that they ought to stock-up in case oil tanker drivers go on strike leading to long queues at the pump. Then the government issued advice not to “panic.”

Now the petrol station owners’ lobby group is demanding talks, according to the BBC. Seven crude hauliers at the heart of the tanker drivers’ dispute are Wincanton, DHL, BP, Hoyer, JW Suckling, Norbert Dentressangle and Turners. They are responsible for supplying 90% of the UK's petrol stations and some of the country's airports. Workers at DHL and JW Suckling voted against strike action but backed action short of a strike in a dispute over “safety and work conditions”.

The run on petrol retail outlets could continue until Easter Monday according to some sources. Continuing with the UK, Total’s leak from the Elgin gas platform, 150 miles off Aberdeen, which has been leaking gas for the past three days is rumoured to be costing the French giant US$1.5 million per day.

Total is the operator (46.17% stake) of the Elgin/Franklin complex, with Eni and BG Energy holding 21.9% and 14.1% interests respectively. Production on the Elgin, Franklin and West Franklin fields, which averages 130,000 barrel of oil equivalent per day (boepd), is now temporarily shut but ratings agencies Fitch Rating’s and Moody’s believe it is not another “Deepwater Horizon.”

“We have not factored into the company's ratings any catastrophic accident on the platform resulting in an explosion, or a dramatic worsening of the current situation. However, we have considered a "worse-than-base-case" scenario where Total may have to shut down the Elgin field to stop the gas leak. This would imply the loss of a producing field that is worth, in net present value terms, €5.7 billion according to third party valuations. Were the field to become permanently unusable it would cost Total €2.6 billion - its share in Elgin - and the company might have to compensate its partners for the remaining €3.1 billion,” notes a Fitch statement.

Total had around €14 billion in cash on balance sheet at December 2011, and about €10 billion in available unused credit lines. Elsewhere, Petrobras' average oil and natural gas output in Brazil and abroad was 2,700,814 barrels of oil equivalent per day (boepd) in February. Considering only the fields in Brazil, production added up to 2,455,636 boepd. In February, oil output exclusively from domestic fields reached 2,098,064 barrels per day, while natural gas production totaled 56,849,000 cubic meters.

Finally, the Oilholic leaves you with a view of the windiest place on the Pacific Coast and the second foggiest place on the North American continent – Point Reyes and its lighthouse built in 1870.

According to the US National Park Service, weeks of fog, especially during the summer months, frequently reduce visibility to hundreds of feet and the historic lighthouse has warned mariners of danger for more than a hundred years.

A US Park Ranger on duty at the Lighthouse said the lens in the Point Reyes Lighthouse is a "first order" Fresnel lens, the largest size of Fresnel lens courtesy Augustin Jean Fresnel of France who revolutionised optics theories with his new lens design in 1823.

Before Fresnel developed this lens, lighthouses used mirrors to reflect light out to sea. The most effective lighthouses could only be seen eight to twelve miles away. After his invention, the brightest lighthouses – including this one – could be seen all the way to the horizon, about twenty-four miles. The Point Reyes Headlands, which jut 10 miles out to sea, pose a threat to each ship entering or leaving San Francisco Bay (click on map to enlarge).

The Lighthouse was retired from service in 1975 when the US Coast Guard installed an automated light. They then transferred ownership of the lighthouse to the National Park Service, which has taken on the job of preserving this fine specimen of American heritage. It is an amazing site and it was a privilege to have seen it and the famous fog.

The area also has a very British connection. The road leading up the rocky shoreline where the lighthouse is situated is named – Sir Francis Drake Boulevard – after the legendary British Navy Vice Admiral and a Crown explorer of the seas. It is thought that Sir Francis’ ship The Golden Hinde landed somewhere along the Pacific coast of North America in 1579, claiming the area for England as "Nova Albion."

The road itself is an east to west traffic linkage in Marin County, California, running just west of the Richmond-San Rafael Bridge to the trailhead for the Lighthouse right at the end of the Point Reyes Peninsula. His landing place has often been theorised to be at what is now called Drakes Bay on Point Reyes, the western terminus for the boulevard. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Oilholic at the Point Reyes Lighthouse, California, USA. Photo 2: Valero Gas Station Price Board, Sunnyvale, California, USA. Photo 3: Point Reyes Lighthouse © Gaurav Sharma. Photo 4: Archive photo of Point Reyes Lighthouse in 1870. Photo 5: Map of Point Reyes © Point Reyes Visitor Center / US National Parks Service. Photo 6: Oilholic on Sir Francis Drake Boulevard © Gaurav Sharma.

India’s Iran connection & the crudely high price

Don’t say the Oilholic did not tell you so after his Indian adventure – that India will find it very hard to match Europeans on censuring Iran in ‘crude’ terms! An interesting newswire copy from the Indo-Asian News Service (IANS) as cited by broadcaster NDTV notes that in fact, India is set to step up its energy and business ties with Tehran.

The news emerges in wake of an attack earlier this month on an Israeli diplomat carried out barely yards from the Indian Prime Minister’s residence in Delhi, for which Isreal is blaming Iran. It shows you how ‘crude’ the Delhi-Tehran ties are. The blogosphere is rife with news that it is becoming increasingly difficult for Indian oil companies to pay their Iranian counterparts in wake of international sanctions which hamper processing of international payments and place limits on what the central bank - Reserve Bank of India (RBI) - can or cannot do. Well placed sources suggest that various options from routing payments via Turkey and in suitcases are being trialled.

Pragmatically speaking, few can blame India for not curtailing ties with a country which supplies 10% of its crude imports. The Iranian situation coupled with the geopolitical influence of other events in Nigeria and Sudan alongside a Greek rescue and the Chinese Central bank’s cut of the required reserve ratio of its domestic banks (on Saturday to ease borrowing) have all come together to introduce bullish trends.

The crude price is currently at an 8-month high; when last checked @13:45GMT on Feb 23rd – the ICE Brent forward month futures contract was at US$124.33 per barrel and WTI was at US$106.33 per barrel. Three City analysts told the Oilholic this morning that the strong upside rally in the oil market is likely to continue for some time yet. Additionally, in a note to clients JP Morgan Chase raised its 2012 price forecast for Brent crude by US$6 to US$118 a barrel and its 2013 forecast by US$4 to US$125 a barrel.

Meanwhile, former UK Chancellor of the Exchequer Lord Lamont – who is now the Chairman of the British-Iranian Chamber of Commerce – recently told BBC Radio 4 that imposing economic sanctions on Iran will not work.

"I can only say we are banging our heads against a wall with this approach...Iran will not buckle under these sanctions. The effect of sanctions is to hit the private sector in Iran, drive companies bankrupt and drive them into the arms of the government, or into the hands of the Revolutionary Guards and into alliances with people in the government smuggling the goods they desperately need," he said.

"I'm not sure this will have the right effect. Could this produce regime change? It's possible but in my view it's just as likely that it will bolster the strength of the regime," Lord Lamont concluded. According to the BBC, data compiled by companies exporting to Iran show that direct trade dropped from just under £500 million in 2008 - to an estimated £170 million in 2011. Blimey – didn’t know we had that much bilateral trade in the first place!

Moving away from what a former UK Chancellor said, an Indian wire reported and the Oilholic ranted about, it is time to discuss some interesting bits of reading material. This humble blog’s rapidly rising North American fan base (to put it modestly) would be keen to know that Reuters’ very own resident Oilholic – Tom Bergin’s splendid book on BP’s Macondo fiasco and its corporate culture – Spills and Spin: The Inside Story of BP – saw its US edition launched earlier this week.

Here’s the review, and if you lot in the US haven’t been cheeky and ordered a UK copy from an internet retailer, the Oilholic would recommend that you visit you a friendly neighbourhood bookstore (or library) where you are likely to find a local edition. From Bergin’s book which raises serious questions on corporate ethics to a Pastor who raises a rather pious question for us all really - Where would Jesus Frack?

According to the Pittsburgh Tribune Review, a pastor told environmentalists last month that there is a scriptural basis for opposing Marcellus Shale drilling in the US. The Rev. Leah Schade, pastor of the United in Christ Church in Union County, Pennsylvania, USA, wore a hand-sewn white patch that said, "WWJF - Where Would Jesus Frack?" and dropped to her knees to demonstrate the power of prayer.

Asked later to answer the question on her blouse, Schade said, "I don't believe Jesus would be fracking anywhere." She cited Genesis 2;15: "God put human beings into the Garden to till it and keep it, not drill and poison it." Amen!

Continuing with interesting things to read, finally here is a comparison drawn by BBC journalist Vanessa Barford on what are the competing claims of UK and Argentina over the Falkland Islands – an old diplomatic spat which has recently acquired a crude dimension. Last but not the least, here is a video of yours truly on an OPEC broadcast discussing project investment by the cartel at its 160th meeting of ministers in December. That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo I: Veneco Oil Platform © Rich Reid - National Geographic. Photo II: Front Cover (US Edition) – Spills and Spin © Random House Publishers.

EU’s Iran ban, upcoming Indian adventure & Cairn

Earlier on Monday and in line with market expectations, the European Union agreed to impose an embargo on the import of Iranian crude oil. The EU, which accounts for 20% of Iran’s crude exports, now prohibits the import, purchase and transport of Iranian crude oil and petroleum products as well as related finance and insurance. All existing contracts will have to be phased out by July 1st, 2012.

In response, Iran declared the ban as "unfair" and "doomed to fail", said it will not force it to change course on its controversial nuclear programme and renewed threats to blockade the Strait of Hormuz. Going into further details, EU Investment in as well as the export of key equipment and technology for Iran's petrochemical sector is also banned.

A strongly worded joint statement by British Prime Minister David Cameron, French President Nicolas Sarkozy and German Chancellor Angela Merkel says, “Until Iran comes to the table, we will be united behind strong measures to undermine the regime’s ability to fund its nuclear programme, and to demonstrate the cost of a path that threatens the peace and security of us all.”

That’s all fine and yes it will hurt Iran but unless major Asian importing nations such as China, India and Japan decide to ban Iranian imports as well, EU’s ban would not have the desired impact. Of these, China alone imports as much Iranian oil as the EU, Japan accounts for 17% of the country’s exports, followed by India (16%) and South Korea (9%).

So until the major Asian economies join in the embargo, both EU and Iran will end up hurting themselves. As a Sucden Financial note concludes, “Unless a deal can be agreed unilaterally, it is likely that the weak European economies could suffer from firmer crude prices whilst relatively robust Asian economies might benefit from preferential crude trade agreements.”

China is unwilling to follow suit while it is thought that Japan and South Korea are seeking supply assurances from other sources before reacting. India’s response had been lukewarm in the run-up the EU’s decision. Now that the decision has been made, it will be interesting to note how the Indian government responds. The Oilholic is heading to India this week (and for better parts of the next) and will try to sniff out the public and government mood.

Meanwhile, Fitch Ratings has said the EU embargo will increase geopolitical risk in the Middle East region supporting high oil prices. The agency considers blocking the Strait of Hormuz - the world's most important oil chokepoint - to be a low-probability scenario and believes any obstruction to trade routes would have a short duration if it did actually transpire.

Arkadiusz Wicik, Director in Fitch's European Energy, Utilities and Regulation team and an old contact of the Oilholic’s, feels that the EU ban on Iranian oil is largely credit neutral for EU integrated oil and gas companies. "The cash flow impact of the ban may be negative for refining operations, but should be positive or neutral for upstream operations," he says.

The most likely scenario is that the EU embargo will result in higher oil prices. However, prices may not necessarily increase markedly from current levels as some of the risks related to the EU ban on Iranian oil appear factored in already.

A new Fitch report further notes the ban is likely to have a moderately negative impact on EU refiners as high oil prices may further erode demand for refined products in Europe. This would worsen the already weak supply-demand balance in European refining. The embargo may also change oil price spreads in Europe as Iranian crude imports would likely be replaced with alternative crude, which may be priced at a lower discount to Brent than Iranian crude oil.

EU refiners' security of oil supply is unlikely to be substantially affected by an Iran ban. There are alternative suppliers, such as Saudi Arabia (which has said it is able and willing to increase oil production to meet additional demand), Russia and Iraq. Libyan oil production is also recovering. Iranian oil accounted for just 5.7% of total oil imports to the EU in 2010, and 4.4% in Q111. Furthermore, the sanctions will be implemented gradually by July 1st, 2012, which should give companies that use Iranian crude oil time to find alternative suppliers, the report notes.

Southern European countries - Italy, Spain and Greece - are the largest importers of Iranian crude oil in the EU. A rise in oil prices could be further bad news for these countries, which already face a weak economic outlook in 2012.

“The impact of the new US sanctions signed into law late last year against Iran is difficult to predict at this stage. It is not certain whether Asian countries, which are by far the largest importers of Iranian crude, accounting for about 70% of total Iranian oil imports, will substantially reduce supplies from Iran in 2012 and replace them with other OPEC sources as a result of the new US sanctions,” the Fitch report notes further.

The agency’s report does make one very important observation – one that has been doing the rounds in the City ever since news of the ban first emerged – that’s if Asian reduction is substantial, in combination with the EU ban, it could considerably lower OPEC's spare production capacity. In such a scenario, the global oil market would have less flexibility in the event of large unexpected supply interruptions elsewhere, potentially sending oil prices much higher than current levels.

Moving away from the Iranian situation, Cairn Energy has sold a 30% stake in one of its Greenland exploration licences to Norway’s Statoil. The UK independent upstart spent nearly £400 million in exploration costs last year with little to show for it as no commercially exploitable oil or gas discovery was recorded. While the percentage of the stake has been revealed, neither Cairn nor Statoil are saying how much was paid for the stake. Nonetheless, whatever the amount, it would help Cairn mitigate exploration costs and risks as it appears to be in Greenland for the long haul.

Elsewhere, there is positive and negative news on refineries front. Starting with the bad news, shares in Petroplus – Europe’s largest independent refiner – were suspended from trading on the Swiss SIX stock exchange on Monday at the company’s request. As fears rise about Petroplus defaulting on its debt following an S&P downgrade last month and yet another one on January 17th, looks like the refiner is in a fight for its commercial life.

Lenders suspended nearly US$1 billion in credit lines last month which prevented Petroplus from sourcing crude oil for its five refineries. However, it had still managed to keep refineries at Coryton (Essex, UK) and Ingolstadt (Germany) running at reduced capacity. Late on Monday, Bloomberg reported that delivery lorries did not leave the Coryton facility and concerns are rising for the facility’s 1000-odd workforce. PwC, which has been appointed as the administrator of Petroplus' UK business, said on Tuesday that it aims to continue to operate the Coryton facility without disruption. The Oilholic hopes for the best but fears the worst.

Switching to the positive news in the refineries business, China National Petroleum Corp, Qatar Petroleum and Royal Dutch Shell agreed plans on January 20th for a US$12.6 billion refinery and petrochemical complex in eastern China. Quite clearly, hounded by overcapacity and poor margins in Europe, the future of the refineries business increasingly lies in the Far East on the basis of consumption patterns. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil tanker © Michael S. Quinton / National Geographic.

Looming embargo on Iran, Nigeria & few other bits

An EU ban on Iranian crude imports in response to the country’s continued nuclear programme is imminent but not immediate or so the City analysts and government sources would have you believe. Furthermore, news agency Bloomberg adds that the planned embargo is likely to be delayed by up to six months as European governments scramble to seek alternative sources.

The Japanese and Indian governments are also looking to reduce dependence on Iranian imports according to broadcasts from both countries while OPEC has indicated that it does not wish to be involved in row. Add the ongoing threats strike threats by Nigeria’s largest oil workers union, the Pengassan, as well the second largest, Nupeng, and political tension in the country to the Iranian situation and you don’t need the Oilholic to tell you that the short term risk premium is going mildly barmy.

It is nearly the end of the week and both benchmarks have rebounded with City analysts forecasting short term bullishness. With everyone scrambling for alternative sources, pressure is rising on already tight supply conditions notes Sucden Financial analyst Jack Pollard. “With the near-term geopolitical risk premium being priced in, Brent’s backwardation looks fairly assured as the front spreads continue to widen. Well-bid Italian and Spanish auctions have no doubt supported risk appetite, as the US dollar tracks back to lend upward pressure on commodities,” he adds.

When the Oilholic checked on Thursday, the Brent forward month futurex contract was resisting the US$110 per barrel level while WTI was resisting the US$99 level sandwiched between a bearish IEA report and geopolitical football. The next few weeks would surely be interesting.

Away from crude pricing, to a few corporate stories, ratings agency Moody’s has affirmed LSE-listed Indian natural resources company Vedanta Resources Plc's Corporate Family Rating of Ba1 but has lowered the Senior Unsecured Bond Rating to Ba3 from Ba2. The outlook on both ratings is maintained at negative following the completion of the acquisition of a controlling stake in Cairn India, on December 8, 2011.

Since announcing the move in August 2010, Vedanta has successfully negotiated the course of approvals, objections and amended production contract arrangements and now holds 38.5% of Cairn India directly, with a further 20% of the company held by Sesa Goa Ltd., Vedanta's 55.1%-owned subsidiary.

Moody’s believes the acquisition of Cairn India should considerably enhance Vedanta's EBITDA, but the agency is concerned with the sharply higher debt burden placed on the Parent company. In order to lift its stake from 28.5% to 58.5%, Vedanta drew US$2.78 billion from its pre-arranged acquisition facilities. Coupled with the issue of US$1.65 billion of bonds in June 2011, debt at the Parent company level is now in excess of US$9 billion on a pro forma basis. This compares with a reported Parent equity of US$1 billion at FYE March 2011.

Moving on, Venezuelan oil minister Rafael Ramírez said earlier this week that his country had decided to compensate ExxonMobil for up to US$250 million after President Hugo Chávez nationalised all resources in 2007. Earlier this month the International Chamber of Commerce in Paris, already stated that the country must pay Exxon Mobil a total of US$907 million, which after numerous reductions results in - well US$250 million.

Elsewhere, law firm Herbert Smith has been advising HSBC Bank Plc and HSBC Bank (Egypt) on a US$50 million financing for the IPR group of companies, to refinance existing facilities and to finance the ongoing development of IPR's petroleum assets in Egypt – one of a limited number of financings in the project finance space in Egypt since the revolution. It follows four other recent financings for oil and gas assets in Egypt on which Herbert Smith has advised namely – Sea Dragon Energy, Pico Petroleum, Perenco Petroleum and TransGlobe Energy.

On a closing note and sticking with law firms, McDermott Will & Emery has launched a new energy business blog – Energy Business Law – which according to a media communiqué will provide updates on energy law developments, and insights into the evolving regulatory, business, tax and legal issues affecting the US and international energy markets and how stakeholders might respond. The Oilholic applauds MWE for entering the energy blogosphere and hopes others in the legal community will follow suit to enliven the debate. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Pipeline, South Asia © Cairn Energy.

OPEC 'maintains' production at 30 million bpd

In line with market expectations and persistent rumours heard here all morning in Vienna, OPEC has agreed to officially maintain its crude production quota at 30 million barrels per day (bpd) at its 160th meeting, thereby legitimising the increase the Saudis triggered after the acrimony of the last meeting in June.

The OPEC Secretary General Abdalla Salem El-Badri said the heightened price volatility witnessed during the course of 2011 is predominantly a reflection of increased levels of speculation in the commodities markets, exacerbated by geopolitical tensions, rather than a result of supply/demand fundamentals.

Ministers also expressed concern regarding the downside risks facing the global economy including the Euro-zone crisis, persistently high unemployment in the advanced economies, inflation risk in emerging markets and planned austerity measures in OECD economies.

“All these factors are likely to contribute to lower economic growth in the coming year. Although world oil demand is forecast to increase slightly during the year 2012, this rise is expected to be partially offset by a projected increase in non-OPEC supply,” El-Badri noted.

Hence, OPEC decided to maintain the production level of 30 million bpd curiously “including production from Libya, now and in the future”. The quota would be reviewed in six months and does not include Iraqi supply. The cartel also agreed that its members would, if necessary, take steps including voluntary downward adjustments of output to ensure market balance and reasonable price levels.

The last bit stirred up the scribes especially as El-Badri, himself a Libyan, noted that his country’s production will be back to 1 million bpd “soon” followed by 1.3 million bpd end-Q1 2012, and 1.6 million at end of Q2 2010; the last figure being the pre-war level.

Despite persistent questioning, the Secretary General insisted that Libyan production will be accommodated and 30 million bpd is what all members would be asked to adhere to formally. He added that the individual quotas would be reset when Libyan production is back to pre-war levels.

El-Badri also described the "meeting as amicable, successful and fruitful" and that OPEC was not in the business of defending any sort of crude price. “We always have and will leave it to market mechanisms,” he concluded.

Iran's Rostem Ghasemi said the current OPEC ceiling was suitable for consumers and producers. “We and the Saudis spoke in one voice.” He also said his country was "cool" on possible oil export embargoes but neither had any news nor any inclination of embargoes being imposed against his country yet. OPEC next meets in Vienna on June 14th, 2012.

Following OPEC’s move, the Oilholic turned the floor over to some friends in the analyst community. Jason Schenker, President and Chief Economist of Prestige Economics and a veteran at these events, believes OPEC is addressing a key question of concern to its members with the stated ceiling.

“That question is how to address the deceleration of global growth and pit that against rising supply. And what OPEC is doing is - not only leaving the production quota essentially unchanged but also holding it at that unchanged level,” Schenker said.

“When the Libyan production does indeed come onstream meaningfully or to pre-war levels between now and Q2 or Q3 of 2012, smart money would be on an offsetting taking place via a possible cut from Saudi Arabia,” he concluded.

Myrto Sokou, analyst at Sucden Financial Research, noted that an increase (or rather the acknowledgement of an increase) in the OPEC production limit after three years might add further downward pressure to the crude price for the short-term with a potential for some correction lower in crude oil prices.

“On top of this, the uncertain situation in the Eurozone continues to dominate the markets, weighting heavily on most equity and commodity prices and limiting risk appetite,” he said. And on that note, it is goodbye from the OPEC HQ. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2011. Photo: OPEC's 160th meeting concludes in Vienna, Austria - seated (R to L) OPEC Secretary General Abdalla Salem El-Badri and President Rostem Ghasemi © Gaurav Sharma 2011.

An intensely ‘crude’ few days @WPC

In keeping with the intensity of World Petroleum Congresses of the past, the Oilholic’s first two days here have been – well – intense. The 20th WPC opened with customary aplomb on Dec 4th with an opening ceremony where feeding 5,000 delegates was a bit slow but the Qatari Philharmonic Orchestra tried its best to perk things up and make up for it.

When things began in earnest on Dec 5th – the Oilholic was spoiled for choice on what to and not to blog about and finding the time for it. Beginning with our hosts, in his inaugural address to Congress, Sheikh Hamad Bin Khalifa Al-Thani, Emir of the State of Qatar highlighted that the event was being held in the Middle East for the first time; a wrong has been right – after all the region exports bulk of the world’s oil.

Welcoming and thanking aside, the Emir made a very important point about why cooperation here among crude importers and exporters is really necessary now more than ever.

“The growing needs for oil and gas requires enormous investments by the exporting countries. The financing of these investments and securing their profitability require the most accurate information possible about the factors affecting the global demand for oil & gas to reduce the degree of risk that these investments may be subjected to,” he said.

“It is not reasonable to ask the Exporting Countries to meet the future needs for these two commodities while at the same time the consumer countries carryout unilateral activities that augment the risks facing these investments,” the Emir concludes. Well said sir – consumers need to get their act together too.

Three of the biggest consumers are here in full force, i.e. the US, Indian and Chinese delegations; the size of latter’s delegation rivals even the Qatari participation. Completing the BRICs – Brazil and Russia are here seeking partners. Lukoil is looking to expand via investments while Rosneft is seeking a greater interaction with Norway’s Statoil. Brazilian behemoth Petrobras has been flagging its wares including details about the presence of oil at a prospection well (4-BRSA-994-RJS), located in Campos Basin, in the area known as Marlin Complex.

The well, commonly known as Tucura, lies between the production fields of Voador and Marlim, at a water depth of 523 meters. Located 98 km from the shore of Rio de Janeiro State, the well is 3km from Marlin's Field and 2.3 km from the P-20 platform. The discovery was confirmed by sampling in post-salt rock in a reservoir located at a water depth of 2,694 meters.

It follows Petrobras’ confirmation on Nov. 23 about the presence of a good quality oil in well (4-BRSA-1002-SPS), in south Santos Basin, in an area known as Tiro and Sidon. Petrobras CEO José Sergio Gabrielli de Azevedo is busy outlining future plans and the company's activities in Brazil and in the world.

It seems the Brazilian major intends to invest US$225 billion between 2011 and 2015 with almost 60% of this going towards exploration and production projects.

Gabrielli highlighted Brazil as one of the largest and fastest growing markets in the world in terms of oil consumption. By way of comparison, Brazil's annual oil consumption in 2010 was up 2.1%, in contrast to a decline of 0.04% in OECD countries for the same period.

More later; keep reading, keep it crude!

© Gaurav Sharma 2011. Photo: 20th World Petroleum Congress Opening Ceremony & Dinner, Dec 4th, 2011 © Gaurav Sharma 2011.

‘Quest’ for energy security vis-à-vis geopolitics

The current disruption of the geostrategic balance that had underpinned the Middle East for decades is bound to cause ripples in energy markets. But don't these recent developments only add to scares of the past. In his latest work 'The Quest', a follow-up to his earlier work 'The Prize', author Daniel Yergin notes that in a world where fossil fuels still account for more than 80% of the world's energy, crises underscore a fundamental reality - how important energy is to the world.

This weighty volume is Pulitzer Prize winner Yergin's attempt to explain that importance intertwined in a story about the quest for energy security, oil business, search for alternatives to fossil fuels and the world we live in. Three fundamental questions shape this free-flowing and brilliant narrative spread over 800 pages split by six parts containing some 35 detailed chapters. To begin with, will enough energy be available to meet the needs of a growing world and crucially at what cost and with what technologies?

Secondly, how can the security of the energy system on which the world depends be protected and finally, what will be the impact of environmental concerns? The author gives his answers to these profound questions citing international events and technological developments of the decades past and present.

Part I discusses the new and more complex world order after the Gulf War, Part II focuses on energy security issues while Part III discusses the advent of electricity and "gadgetwatts". Part IV discusses climate change, Part V clean technologies and lastly in Part VI, Yergin offers the reader his take on the road ahead.

Shale, oil sands, 'rise' of gas, wind, solar, biofuels, offshore and peak oil versus the perceptively "ever expanding range of the drillbit" have all been discussed in detail by the author. In all honestly, it is neither a pro-fossil fuel rant nor does it belittle the renewables business. Rather it highlights the complexities of both sides of the carbon divide with the macroeconomic and geopolitical climate serving a constant backdrop.

Current the book surely is, accompanied by a healthy dosage of historical contextualisation and Yergin's own take on whether nation states - chiefly the US and China - are destined for a clash over energy security. The Oilholic read page after page fascinated by an extraordinary range of 'non-fiction' characters, places, technologies, theories and the dramatic stories they resulted in.

What really struck the Oilholic was that the narrative is free from industry gobbledegook (or its duly explained where applicable) and as such should appeal to a wider mainstream readership base than just energy professionals and those with a mid to high level of market knowledge. Its crisp mix of storytelling and analysis suits petroleum economists and leisure readers alike.

While the Oilholic attaches a caveat that a book of 800 pages is not for the faint hearted, he is happy to recommend it to business professionals, students of economics and the energy business, and as noted above - those simply interested in current events and the history of the oil trade. It is of course, a must for fellow Oilholics.

© Gaurav Sharma 2011. Photo: Cover of ‘The Quest: Energy, Security, and the Remaking of the Modern World’ © Allen Lane/Penguin Publishers 2011.

Sucden to Soc Gen: The fortnight’s crude chatter

The last two weeks have been tumultuous for the oil market to say the least. This morning, the ICE Brent crude forward month futures price successfully resisted the US$100 level, while WTI’s resistance to US$80 level has long since crumbled. Obviously, the price of crude cannot divorce itself from the global macroeconomic picture which looks pretty grim as it stands, with equity markets plummeting to fresh new lows.

Bearish sentiments will persist as long as there is uncertainty or rather the "Greek tragedy" is playing in the Eurozone. Additionally, there is a lack of consensus about Greece among EU ministers and their next meeting - slated for Oct 13th - has been cancelled even though attempts are afoot to allay fear about a Greek default which hasn’t yet happened on paper.

Sucden Financial Research’s Myrto Sokou notes that following these fragile economic conditions across the Eurozone and weak global equity markets, the energy market is under quite a bit of pressure.

“The stronger US dollar weighs further to the market, while investors remain cautious and are prompted to some profit-taking to lock-in recent gains. We know that there is so much uncertainty and nervous trading across the markets at the moment, as the situation in the Eurozone looks daunting, “ready for an explosion”. So, we expect crude oil prices to remain on a downside momentum for the short-term, with WTI crude oil retesting the US$70-$75 range, while Brent consolidating around the US$98-$100 per barrel,” Sokou adds.

Many in the City opine that some commodities are currently trading below long term total costs, with crude oil being among them. However, in the short-run, operating costs (the short run marginal costs) are more important because they determine when producers might cut supply. Analysts at Société Générale believe costs should not restrict prices from dropping, complementing their current bearish view on the cyclical commodities.

In a note to clients on Sep 29th, they noted that the highest costs of production are associated with the Canadian oil sands projects, which remain the most expensive source of significant new supply in the medium to long term (US$90 represents the full-cycle production costs).

“However global oil supply is also influenced by political factors. It should also be noted that while key Middle East countries have very low long term production costs, social costs also need to be added to these costs. These costs, in total, influence production decisions; consequently, this may cause OPEC countries cutting production first when, in fact textbook economics says they should be the last to do so,” they noted further.

Furthermore, as the Oilholic observed in July – citing a Jadwa Investment report – it is commonly accepted by Société Générale and others in the wider market that Saudi Arabia needs US$90-$100 prices to meet its national budget; and this is particularly true now because of large spending plans put in place earlier this year to pre-empt and counter public discontent as the Arab Spring unfolded.

Therefore, in a declining market, Société Générale expects long-dated crude prices to show resilience around that level but prices are still significantly higher than the short-run marginal costs so their analysts see room for further declines.

Concurrently, in its September monthly oil market report, the International Energy Agency (IEA) cut its forecast for global oil demand by 200,000 barrels per day (bpd) to 89.3 million bpd in 2011, and by 400,000 bpd to 90.7 million bpd in 2012. Factoring in the current macroeconomic malaise and its impact on demand as we’ve commenced the final quarter of 2011, the Oilholic does not need a crystal ball to figure out that IOCs will be in choppy waters for H1 2012 with slower than expected earnings growth.

In fact ratings agency Moody’s changed its outlook for the integrated oil & gas sector from positive to stable in an announcement last week. Francois Lauras, Vice President & Senior Credit Officer - Corporate Finance Group at Moody’s feels that the weakening global macroeconomic conditions will lead to slower growth in oil consumption and an easing in current market tightness over the coming quarters, as Libyan production gradually comes back onto the market.

The Oilholic is particularly keen to stress Mr. Lauras’ latter assertion about Libya and that he is not alone in thinking that earnings growth is likely to slow across the sector in 2012. Moody’s notes that as crude oil prices ease and pressure persists on refining margins and downstream activities slower earnings are all but inevitable. This lends credence to the opinions of those who advocate against the integrated model. After all, dipping prices are not likely to be enjoyed by IOCs in general but among them integrated and R&M players are likely to enjoy the current unwanted screening of the Eurozone “Greek tragedy” the least.

© Gaurav Sharma 2011. Photo: Alaska Pipeline, Brooks Range, USA © Michael S. Quinton / National Geographic

The Bears are back in Crude town!

It seems the Bears are back in Crude town and are hoping to lurk around for a little while yet. So this week begins like last week ended with the TV networks screaming how crude it all is. Well a look at either benchmark reveals a decline of above US$3 per barrel in Monday’s intraday trading alone and both benchmarks if observed over a seven-day period display a dip of 7% and above, more pronounced in the US given the “not so smart” political shenanigans related to the debt ceiling and S&P’s ratings downgrade of the country for the first time in its history.

The Oilholic cannot quite understand why some people are either shocked or displaying a sense of shock over the downgrade because the writing was on the wall for profligate America. As politicians on both sides were more interested in points scoring rather than sorting out the mess, what has unfolded is more sad than shocking. Given the US downgrade and contagion in the EU, short term trends are decidedly bearish for crude markets. However, if it goes beyond the average market scare and develops into a serious recessionary headwind then Brent could finally fall below US$100 per barrel and WTI below US$80.

Given the divergence in both benchmark levels, analysts these days offer different forecasts for both with increased vigour via a single note. For instance, the latest investment note from Bank of America Merrill Lynch (BoAML) sees Brent stabilising at US$80 and WTI at US$60 in the face of mild recessionary headwinds. However, the Oilholic agrees with their assertion there would be a Brent claw-back to prior levels as OPEC turns the taps off.

“In the US, we would see landlocked WTI crude oil prices stabilising at a much lower level, as OPEC supplies are of little relevance to the supply and demand balances for crude oil in the Midwest. With shale output still projected to increase substantially over the next few months, we believe that WTI crude oil prices could briefly drop to US$50/barrel under a recession scenario only to recover back up towards US$60/barrel as shale oil output is scaled back,” BoAML analysts noted further.

Over the short term, what looks bearish (at worst) or mixed (at best) for crude, is evidently bullish for precious metals where gold is the vanguard of the bubble. Does it make sense – no; is it to be expected – yes! Nevertheless, long term supply/demand permutations suggest an uptick in crude prices is more than likely by middle of 2012 if not sooner.

Moody's expects oil prices to remain high through 2012 which will support increasing capital spending by exploration and production (E&P) companies worldwide as they re-invest healthy cash flow streams. About 70% of capital spending will take place outside of North America, with Latin American companies including Brazilian operator Petrobras leading the way, according to a report published July-end.

Additionally, development activity in the 2010 Macondo oil spill-affected Gulf of Mexico – while building some momentum – is still hampered by a slow permit process, says the report.

However, Stuart Miller, vice president at Moody’s notes, "But the industry might approach the top of its cycle during the next year as shorter contracts and lower day rates change the supply/demand balance."

Understandably, high risk, high reward modus operandi of the E&P business will remain more attractive as opposed to the refining and marketing (R&M) end of the crude business as the only way is up given when it comes to long term demand. Even the non demand-driven oil upsides (for example – as seen from Q2 2002 to Q2 2003 and Q3 2007 to Q3 2008) were a shot in the arm of E&P elements of the energy business (as well as paper traders).

Moving on to other chatter, Mercer’s cost of living survey found Luanda, the capital of Angola as the world's most expensive city for expatriates. It topped the survey for the second successive year, followed by Tokyo in Japan and N'Djamena in Chad. New to the top 10 were Singapore, ranked eighth, and Sao Paulo in Brazil, which jumped from 21st to 10th. The Oilholic sees a hint of crudeness in there somewhere.

Meanwhile, the National Iranian Oil Company, which does not get to flex its muscles very often in wake of international sanctions, got to do so last week at the expense of crude-hungry India. The burgeoning Indian economy needs the oil but US sanctions on Iran make it difficult to send international bank payments.

As a result Indian companies have been looking for alternative ways to make payments to Iran after the Reserve Bank of India (RBI) halted a clearing mechanism at the end Q4 2010. In the interim, the cash-strapped oil rich Iranians threw a strop threatening to cut off supplies to India if payments were not made by August 1, 2011.

However, it now emerges that at the eleventh hour both sides agreed to settle the bill as soon as possible. Well when 400,000 barrels per day or 12% of your crude count is at stake – you have to find novel ways to make payments. The “first” part of the outstanding bill we are told would be paid within a few days.

Crudely sticking with India, that same week, the Indian government finally gave a formal “conditional” approval to LSE-listed mining group Vedanta Resources for its takeover of Cairn Energy's India unit. However, approval came with a condition that Cairn India and India's state-owned Oil and Natural Gas Corp (ONGC) share the royalty payment burden of crude production from their Rajasthan fields.

ONGC owns a 30% stake in the block but pays royalties on 100% of the output under a "royalty holiday" scheme dating from the 1990s aimed at promoting private oil exploration.

The sale, held in impasse since August, has been hit by difficulties resulting from differences between Cairn India and ONGC over the royalties issue. Vedanta (so far) has a 28.5% stake in Cairn India. It wants the government to approve the buyout of another 30% stake in Cairn India from Cairn Energy. Cairn Energy currently owns a 52% stake in Cairn India. Given the government’s greenlight, it should all be settled in a matter of months.

© Gaurav Sharma 2011. Photo: Veneco Oil Platform, California © Rich Reid, National Geographic

BP’s profit, Saudi price targets & CNOOC in Canada

Its quarterly results time and there is only one place to start – an assessment of how BP’s finances are coping in wake of Macondo. Its quarterly data suggests the oil major made profits of US$5.3 billion in the three months to June-end. This is down marginally from the US$5.5 billion it made in Q1 2011 and a predictable reversal of the US$17 billion loss over the corresponding quarter last year when the cost of the Gulf of Mexico spill weighed on its books.

Elsewhere in the figures, BP's oil production was down 11% for the quarter on an annualised basis and the company has also sold US$25 billion worth of assets to date, partly to offset costs of the clean-up operation in the Gulf. City analysts told the Oilholic that BP should count itself lucky as the crude price has been largely favourable over the last 12 months.

Moving away from BP, it is worth turning our attention to the perennially crude question, what price of black gold is the Saudi Arabian Government comfortable with? An interesting report published by Riyadh-based Jadwa Investment suggests that the “breakeven” price for oil that matches actual revenues with expenditures is currently around US$84 per barrel for the Kingdom, comfortably below the global price.

The Oilholic agrees with the report’s authors - Brad Bourland and Paul Gamble – that it is bit rich to assume the Saudis crave perennially high oil prices. Au contraire, high oil prices actually hurt Saudi Arabia’s long term future. Bourland and Gamble feel the Kingdom would be more comfortable with prices below US$100 per barrel; actually a range of US$70-90 per barrel is more realistic.

Using either benchmark, prices are comfortably above the range and are likely to stay there for the rest of the year, if that is what the Saudis are comfortable with. Analysts at Société Générale CIB maintain their view for Brent prices to be in the US$110-120 range in H2 2011 on mixed fundamental and non-fundamental drivers. They note that there may be some slight upside to their Brent forecast, and some moderate downside to their WTI forecast. At 8:00 GMT, ICE Brent forward month futures contract was trading at US$118.04 and WTI at US$99.56.

Looking from a long term macroeconomic standpoint, the Jadwa Investment report notes that after the benign decade ahead, unless the current spending and oil trends are changed, Saudi Arabia faces a very different environment. For instance, domestic consumption of oil, now sold locally for an average of around US$10 per barrel, will reach 6.5 million barrels per day in 2030, exceeding oil export volumes. Jadwa Investment does not expect total Saudi oil production to rise above 11.5 million barrels per day by 2030.

Even with a projected slowdown in growth of government spending, the breakeven price for oil will be over a whopping US$320 per barrel in 2030. Furthermore, the Saudi government will be running budget deficits from 2014, which become substantial by the 2020s. By 2030, foreign assets will be drawn down to minimal levels and debt will be rising rapidly.

Before you go “Yikes”, preventing this outcome, according to Bourland and Gamble, requires tough policy reforms in areas such as domestic pricing of energy and taxation, an aggressive commitment to alternative energy sources, especially solar and nuclear power, and increasing the Kingdom’s share of global oil production. By no means a foregone conclusion, but not all that easy either.

Continuing with the Middle East, apart from crushing dissent and chastising the US government for interference, the Syrian government is apparently also open for crude business. In an announcement on July 7th, the creatively named General Establishment for Geology and Mineral Resources (GEGMR) under auspices of the Syrian Petroleum and Mineral Resources Ministry invited IOCs to bid and develop oil shale deposits in the Khanser region in the north. The Ministry says total crude reserves at the site are “estimated” at 39 billion tonnes with the oil content rate valuation at 5 to 11%.

While the tender books, costing US$3,000 each were issued on July 1st, the Ministry declined to answer how many were sold, who took them up and how the bid round is supposed to work in face of international condemnation of what is transpiring within its borders.

Elsewhere, Chinese state behemoth CNOOC’s recent acquisition of a 100% stake in OPTI Canada Inc, a TSX-listed oil sands producer, made the headlines. The aggregate consideration for the transaction is about US$2.1 billion. OPTI owns a 35% working interest in four oil sands projects in Canada – Long Lake, Kinosis, Leismer and Cottonwood.

Kai Hu, Vice President and Senior Analyst at Moody’s, says "CNOOC investment in this transaction is in line with the company's strategy of growing reserves, partly through overseas acquisitions. This investment – as well as its the previous investments in Eagle Ford and Niobrara shale gas projects – indicate its strong interest in gaining experience in unconventional oil and gas reserves.”

As such, Moody’s feels CNOOC Aa3 issuer and senior unsecured ratings will not be immediately affected by its acquisition. It also helps that there are no US-style murmurings of dissent in Canadian political circles.

© Gaurav Sharma 2011. Photo: Pipeline in Alaska © Kenneth Garrett, National Geographic