The 2013 G8 summit, Syria & crude prices

There is a certain measure of positive symbolism in being here in Northern Ireland for the 2013 G8 summit. Who would have imagined when the Good Friday agreement was signed in 1998, that 15 years later the then sectarian strife-torn province would host the leaders of the eight leading industrialised nations for their annual shindig?

That point was not lost on US President Barack Obama, among the few who didn’t express apprehensions, when UK PM David Cameron announced the venue for the summit last year. Cameron wanted to send a message out to the world that Northern Ireland was open for business and based on what yours truly has seen and heard so far, that's certainly a view many share.

 

Addressing an audience of students in Belfast, Obama said, "Few years ago holding a summit of world leaders in Northern Ireland would have been unthinkable. That we are here today shows the progress made in the path to peace and prosperity [since 1998]."

"If you continue your courageous path towards permanent peace, and all the social and economic benefits that come with it, that won't just be good for you. It will be good for this entire island, for the United Kingdom, for Europe; and it will be good for the world," he added.

Here we all are in Belfast heading to a quaint old town called Enniskillen. Of course, the Oilholic won’t be making his way there in a style befitting a president, a prime minister or a gazillion TV anchors who have descended on Northern Ireland, but get there - he most certainly will - to examine the 'cruder' side of things.

It has barely been a year since the G8 minus Russia (of course) griped about rising oil prices and called on oil producing nations to up their production. "We encourage oil producing countries to increase their output to meet demand. We stand ready to call upon the International Energy Agency (IEA) to take appropriate action to ensure that the market is fully and timely supplied," the G7 said in a statement last August.

Of course since then, we’ve had the US 'Shale Gale', dissensions at OPEC and rising consumption of India and China according to the latest data. The smart money would be on the G7 component of the G8 not talking about anything crude, unless you include the geopolitical complications being caused by Syria, which to a certain extent is overshadowing a largely economic summit.

That wont be a shame because its not for politicians to fiddle with market mechanisms. Nonetheless, the Brent forward month futures touched a 10-week high close to US$107 a barrel on Monday before retreating. Despite a lull, if not a downturn, in OECD economic activity, the benchmark remains in three figures.

Syria's impact on oil markets is negligible, but a prolonged civil war there could affect other countries in the Middle East, worse still drag a few oil producers in. Yet a stalemate between Russian President Vladimir Putin and the West has already become apparent here at the G8. There will, as expected, be no agreement on Syria with the Russians supporting the Assad regime and the West warily fretting over whether or not to supply the Syrian rebels with arms.

Away from geopolitics and the G8, in an investment note to clients, analysts at investment bank Morgan Stanley said the spread between WTI and Brent crude will likely widen in the second half of 2013, with a Gulf Coast "oversupply driving the differential".

The banks notes, and the Oilholic quotes, "WTI-Brent may struggle to narrow below US$6-7 per barrel and likely needs to widen in 2H13 (second half 2013)." That’s all for the moment from Belfast folks, as the Oilholic heads to Enniskillen! In the interim, yours truly leaves you with a view of Belfast's City Hall. Keep reading, keep it 'crude'

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: City Hall, Belfast, Northern Ireland © Gaurav Sharma, June 17, 2013

End of Q1 2013 trade @ CBOT & hot air on shale

As trading came to a close for Q1 2013 at the Chicago Board of Trade (CBOT) on Thursday afternoon, the Oilholic saw crude oil futures rise during the last session of the first quarter aided undoubtedly by a weaker dollar supporting the prices. However, yours truly also saw something particularly telling – fidgeting with the nearest available data terminal would tell you that Brent crude futures slipped nearly 1 percent over Q1 2013. This extended a near-1 percent dip seen in Q4 2012. Overall, Brent averaged just around the US$112 per barrel level for much of 2012 and the Brent-WTI premium narrowed to its lowest level in eight months on March 28. That said, it must be acknowledged that US$112 is still the highest ever average annual price for the benchmark as far as the Oilholic can remember.

In its quarter ending oil market report, the CME/CBOT said improved sentiment towards Cyprus was seen as a supportive force helping to lift risk taking sentiment in the final few days before Easter. On the other hand, concerns over ample near term supply weighed on nearby calendar spreads, in particular the Brent May contract.

In fact, the May versus June Brent crude oil spread narrowed to its slimmest margin since July 2012. Some traders here indicated that an unwinding of the spread was in part due to an active North Sea loading schedule for April and prospects for further declines in Cushing, Oaklahoma supply.

Away from price issues, news arrived here that ratings agency Moody’s reckons an escalation in the cost of complying with US federal renewable fuel requirements poses a headwind for the American refining and marketing industry over the next two years (and potentially beyond if yours truly read the small print right).

Moody’s said prices were spiking for renewable identification numbers (RIN) which the US Environmental Protection Agency (EPA) uses to track whether fuel refiners, blenders and importers are meeting their renewable-fuel volume obligations.

Senior analyst Saulat Sultan said, "US refining companies either amass RINs through their blending efforts or buy them on the secondary market in order to meet their annual renewable-fuel obligations. It isn't yet clear whether recent price increases reflect a potential shortfall in RIN availability in 2014, or more structural and permanent changes for the refining industry."

The impact of higher RIN prices will depend on a company's ability to meet its RIN requirements internally, as well as the amount of RINs it can carry over to 2014 and gasoline export opportunities, Sultan says. Refiners carried over about 2.6 billion excess RINs to 2013 from 2012, but the EPA expects a lower quantity to be carried over to 2014.

"RIN purchasing costs can be sizable, even while refiners are generally enjoying a period of strong profitability, such as they are now. Integrated refining and marketing companies including Phillips 66, Marathon Petroleum and Northern Tier Energy LLC are likely to be better positioned than sellers that do not blend most of their gasoline, such as Valero Energy, CVR Refining LLC and PBF Energy, or refiners with limited export capabilities, such as HollyFrontier," Sultan added.

Concurrently, increasing ethanol blending, which is used to generate enough RINs to comply with federal regulations, raises potential legal issues for refiners. This is because gasoline demand is flat or declining and exceeding the 10% threshold (the "blend wall") could attract lawsuits from consumers whose vehicle warranties prohibit using fuel with a higher percentage. However, Moody's does not believe that companies will raise the ethanol content without some protection from the federal government. 

Meanwhile, all the hot air about the ‘domestic dangers’ and ‘negative implications’ of the US exporting gas is getting hotter. A group – America’s Energy Advantage – has hit the airwaves, newspapers and wires here claiming that "exporting LNG carries with it the potential threat of damaging jobs and investment in the US manufacturing sector as rising exports will drive up the price of gas to the detriment of domestic industries."

So who are these guys? Well the group is backed by several prominent US industrial brands including Alcoa, Huntsman chemicals and Dow Chemical. Continuing with the subject, even though only one US terminal – Sabine Pass – has been permitted to export the fruits of the shale revolution, chatter in forex circles is already turning to shale oil and gas improving the fortunes of the US Dollar!

For instance, Ashok Shah, investment director at London & Capital, feels this seismic shift could improve growth prospects, reduce inflation and diminish the US current account deficit, with significant ramifications for long-term investors.

"For the past decade we have seen the US Dollar in decline, on a trade weighted basis. I believe the emergence of shale oil as a viable energy source looks set to have a considerable impact on the US dollar, and on the global economy as a whole," Shah said.

"Furthermore, a lower oil price will drive lower global headline inflation benefiting the US in particular - and a lower relative inflation rate will be a positive USD driver, improving the long-term purchasing power of the currency," he added.

The Russians are stirring up too. Last week, Gazprom and CNPC signed a 30-year memorandum to supply 38 billion cubic meters (bcm) to 60 bcm of natural gas from Eastern Siberian fields to China from 2018. The negotiations haven’t concluded yet. A legally binding agreement must be signed by June and final documents by the end of the year, covering pricing and prepayment terms. Let us see the small print before making a call on this one. On a related note, ratings agency Fitch says Gazprom is unlikely to offer any meaningful gas price concessions to another one of its customers – Naftogaz of Ukraine – in the short term owing to high spot prices for natural gas in Europe, currently being driven by the continued cold weather.

Sticking with the Russian front, Rosneft, which recently completed the acquisition of TNK-BP, has negotiated an increase in its oil shipments to China from the current 15mtpa to as much as 31mtpa in exchange for a pre-payment, and has agreed on a number of joint projects in exploration, refining and chemicals production with CNPC and Sinopec.

This is it for this post; it is time to bid goodbye to Chicago and Lake Michigan’s shoreline and hop 436 miles across the Great Lakes to say hello to Lake Ontario’s shoreline and Toronto. The Oilholic leaves you with a view of the waterfront and the city’s iconic buildings; the Willis Tower (once Sears Tower is on the left of the frame above).

It’s been a memorable adventure to Illinois, not least getting to visit  CBOT – the world’s oldest options and futures exchange. Leaving is always hard, but to quote Robert Frost – “I have promises to keep, and miles before I go to sleep.” That’s all from the Windy City folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: Exterior of the Chicago Board of Trade. Photo 2: Chicago's Skyline and Lake Michigan, Illinois, USA © Gaurav Sharma.