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’!

To follow The Oilholic on Twitter click here.

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.

Banality of forecasts predicated on short-termism

Oh dear! Oh dear! Oh dear! So the Brent crude price sank to a weekly loss last week; the first such instance in roughly a month. Is the Oilholic surprised? Not one jot. What yours truly is surprised about is that people are surprised! One sparrow does not make spring nor should we say one set of relatively positive Chinese data, released earlier this month, implies bullish trends are on a firm footing.

The Chinese news was used as a pretext by some to go long on the Brent forward month futures contract for March as it neared its closure (within touching distance of US$120 per barrel). And here we are a few days later with the Brent April contract dipping to a February 15 intraday price of US$116.83 on the back of poor industrial data from the US.

 

The briefest of spikes of the week before was accompanied by widespread commentary on business news channels that the price would breach and stay above the US$120 mark, possibly even rise above US$125. Now with the dip of the past week with us, the TV networks are awash with commentary about a realistic possibility that Brent may plummet to US$80 per barrel. You cannot but help laughing when spike n’ dips, as seen over the past few weeks, trigger a topsy-turvy muddle of commentators’ quotes.

 

Sometimes the Oilholic thinks many in the analyst community only cater to the spread betters! Look at the here, the now and have a flutter! Don’t put faith in the wider real economy, don’t examine the macroeconomic environment, just give a running commentary on price based on the news of the day! Nothing wrong with that, absolutely nothing – except don’t try to pass it off as some sort of a science! This blogger has consistently harped on – even at times sounding like a broken record to those who read his thoughts often – that the risk premium provided by the Iranian nuclear standoff is broadly neutral.

 

So much so, that the reason the Brent price has not fallen below US$100 is because the floor is actually being provided by the Iranian situation on a near constant basis. But that’s where it ends unless the country is attacked by Israel; the likelihood of which has receded of late. Syria’s trouble has implications in terms of its civil war starting a broader regional melee, but its production is near negligible in terms of crude supply-side arguments.

 

Taking all factors into account, as the Oilholic did last month, it is realistic to expect a Brent price in the range of US$105 to US$115. To cite a balanced quote, Han Pin Hsi, the global head of commodities research at Standard Chartered bank, said that oil should be trading at US$100 per barrel at the present moment in time were supply-demand fundamentals the only considering factors.

 

In recent research, Hsi has also noted that relatively lower economic growth as well as the current level of tension in the Middle East has already been “priced in” to the Brent price by the wider market. Unless either alters significantly, he sees an average price of US$111 per barrel for 2013.

 

Additionally, analysts at Société Générale note that along with the usual suspects – sorry bullish factors – now priced in, Brent could see some retracement on profit-taking, though “momentum and sentiment are still bullish”. The French bank’s analyst, Mike Wittner, notes that just as the Saudis have (currently) cut production, concerns over prices being “too high” will cause them to increase production. “In short, our view is that Brent has already priced in all the positive news, and it looks and feels toppy to us,” he wrote in an investment note. “Toppy” – like the expression (slang for markets reaching unstable highs whereupon a decline can be expected if not imminent)!

 

On a related note, in its short-term energy outlook released on February 12, the EIA estimates the spread between WTI and Brent spot price could be reduced by around 50% by 2014. The US agency estimates that the WTI will average US$93 and US$92 in 2013 and 2014 respectively, down from US$94 in 2012. It expects Brent to trade at US$109 in 2013 and edge lower to US$101 in 2014, down from the 2012 average of US$112.

 

Elsewhere in the report, the EIA estimates that the total US crude oil production averaged 6.4 million barrels per day (bpd) in 2012, an increase of 0.8 million bpd over 2011. The agency’s projection for domestic crude oil production was revised to 7.3 million bpd in 2013 and 7.8 million bpd in 2014.

 

Meanwhile, money managers have raised bullish positions on Brent crude to their highest level in two years for a third successive week. The charge, as usual, is lead by hedge funds, according to data published by ICE Futures Europe for the week ended February 5.

 

Net-long positions, in futures and options combined, outnumbered net-short positions by 192,195 lots versus a figure of 179,235 the week before; a rise of 6.9% according to ICE’s latest Commitment of Traders report. It brings net-long positions to the highest level since January 2011, the month the current data series began.

 

On the other hand, net-short positions by producers, merchants, processors and users of the crude stuff outnumbered bullish positions by 249,350, compared with 235,348 a week earlier. It is the eighth successive weekly increase in their net-short position, ICE Futures Europe said.

 

Moving away from pricing matters, a few corporate snippets worth flagging up - starting with Gazprom. In a call to investors and analysts earlier this month, the Russian state energy giant finally appeared to be facing-up to greater competition in the European gas market as spot prices and more flexible pricing strategies from Norway’s Statoil and the Qataris put Gazprom’s defence of its conventional oil-indexation pricing policy to the test.

 

Gazprom ceded market share in defence of prices last year, although it did offer rebates to selected customers. However, it appears to be taking a slightly different line this year and aims to cede more ground on prices in a push to bag a higher market share and prop up its overall gas exports by volume.

 

Gazprom revealed that it had paid out US$2.7 billion in 2012 in refunds to customers in Europe, with the company planning another US$4.7 billion in potential price cuts this year in order to make its pipeline gas prices competitive with spot prices and incentivise European customers to make more voluminous gas purchases.

 

Commenting on the move, analysts at IHS CERA noted, “Increasing gas sales volumes by retaining the oil-indexation pricing strategy and then retroactively offering price discounts may be a difficult proposition, however, particularly if Ukraine, Gazprom’s largest gas export customer, continues to reduce its Russian gas purchases in response to Gazprom’s refusal to cut prices.”

 

“Rather than continuing to react to changing market conditions by offering lower prices to customers, Gazprom may need to take a more proactive approach to reducing its gas export prices in order to incentivise customers to buy more gas from the Russian gas firm this year,” they concluded.

 

Finally, TAQA, the Abu Dhabi National Energy Company, said in a statement over the weekend that a new oilfield has been discovered in the North Sea. It reported that two columns of oil have been found since drilling began in November at the Darwin field, about 80 miles north-east of the Shetlands.

 

The field is a joint venture between the Abu Dhabi state-owned company and Fairfield Energy. TAQA acquired some of BP’s North Sea assets for US$1.1 billion in November 2012. That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

To follow The Oilholic on Twitter click here.

 

© Gaurav Sharma 2013. Photo: Andrew Rig, North Sea © BP.  Graph: World crude oil benchmarks © Société Générale Cross Asset Research February 14, 2013.

BP’s sale, South Africa’s move & the North Sea

BP continues to catch the Oilholic’s eye via its ongoing strategic asset sale programme aimed at mitigating the financial fallout from the 2010 Gulf of Mexico spill. Not only that, a continual push to get rid of refining and marketing (R&M) assets should also be seen as positive for its share price.

 

This afternoon, the oil giant inked a deal to sell five of its oil & gas fields in the Gulf of Mexico for US$5.6 billion to Plains Exploration and Production; an American independent firm. However, BP Group Chief Executive Bob Dudley reiterated that the oil giant remains committed to the region.

 

"While these assets no longer fit our business strategy, the Gulf of Mexico remains a key part of BP's global exploration and production portfolio and we intend to continue investing at least US$4 billion there annually over the next decade," he said in statement following the announcement.

 

Last month BP agreed to sell the Carson oil refinery in California to Tesoro for US$2.5 billion. As a footnote, the agreement holds the potential to make Tesoro the largest refiner on the West Coast and a substantial coastal R&M player alongside the oil majors. While regulatory scrutiny is expected, anecdotal evidence from California suggests the deal is likely to be approved. Back in June, BP announced its intention to sell its stake in TNK-BP, the company's lucrative but acrimony fraught Russian venture.

 

One can draw a straight logic behind the asset sales which BP would not contest. A recent civil case filed by the US Department of Justice against BP does not mince its words accusing the oil giant of “gross negligence” over the Gulf of Mexico spill which followed an explosion that led to the death of 11 workers. Around 4.9 million barrels of oil spewed into the Gulf according to some estimates.

 

The charges, if upheld by the court, could see BP fined by as much as US$21 billion. The trial starts in January and BP, which denies the claim, says it would provide evidence contesting the charges. The company aims to raise US$38 billion via asset sales by Q4 2012. However, the Oilholic is not alone is his belief that the sale programme, while triggered by the spill of 2010, has a much wider objective of portfolio trimming and a pretext to get rid of burdensome R&M assets.

 

Meanwhile in Russia, the Kremlin is rather miffed about the European Commission’s anti-trust probe into Gazprom. According to the country’s media, the Russian government said the probe “was being driven by political factors.” Separately, Gazprom confirmed it would no longer be developing the Shtokman Arctic gas field citing escalating costs. Since, US was the target export market for the gas extracted, Gazprom has probably concluded that shale exploration stateside has all but ended hopes making the project profitable.

 

Sticking with Shale, reports over the weekend suggest that South Africa has ended its moratorium on shale gas extraction. A series of public consultations and environmental studies which could last for up to two years are presently underway. It follows a similar decision in the UK back in April.

 

Sticking with the UK, the country’s Office for National Statistics (ONS) says output of domestic mining & quarrying industries fell 2.4% in July 2012 on an annualised basis; the 22nd consecutive monthly fall. More worryingly, the biggest contributor to the decrease came from oil & gas extraction which fell 4.3% in year over year terms.

 

The UK Chancellor of the Exchequer George Osborne has reacted to declining output. After addressing taxation of new UKCS prospection earlier this year, Osborne switched tack to brownfield sites right after the ONS released the latest production data last week.

 

Announcing new measures, the UK Treasury said an allowance for "brownfield" exploration will now shield portions of income from the supplementary charge on their profits. It added that the allowance would give companies the incentive to "get the most out of" older fields. Speaking on BBC News 24, Osborne added that the long-term tax revenues generated by the change would significantly outweigh the initial cost of the allowance.

 

According to the small print, income of up to £250 million in qualifying brownfield projects, or £500 million for projects paying Petroleum Revenue Tax (PRT), would be protected from a 32% supplementary charge rate applied by the UK Treasury to such sites.

 

Roman Webber, tax partner at Deloitte, believes the allowance should stimulate investment in older fields in the North Sea where it was previously deemed uneconomical. Such investment is vital in preserving and extending the life of existing North Sea infrastructure, holding off decommissioning and maximising the recovery of the UK’s oil & gas resources.

 

“Enabling legislation for the introduction of this allowance was already included in the UK Finance Act 2012, announced earlier this year. The allowance will work by reducing the profits subject to the 32% Supplementary Charge. The level of the allowances available will depend on the expected project costs and incremental reserves, but will be worth up to a maximum of £160 million net for projects subject to PRT and £80 million for those that are not subject to the tax,” Webber notes.

 

Finally on the crude pricing front, Brent's doing US$114-plus when last checked. It has largely been a slow start to oil futures trading week either side of the pond as traders reflect on what came out of Europe last week and is likely to come out of the US this week. Jack Pollard of Sucden Financial adds that Chinese data for August showed a deteriorating fundamental backdrop for crude with net imports at 18.2 million metric tonnes; a 13% fall on an annualised basis.

 

Broadly speaking, the Oilholic sees a consensus in the City that Brent’s trading range of US$90 to US$115 per barrel will continue well into 2013. However for the remaining futures contracts of the year, a range of US$100 to US$106 is more realistic as macroeconomics and geopolitical risks seesaw around with a relatively stronger US dollar providing the backdrop. It is prudent to point out that going short on the current contract is based Iran not flaring up. It hasn't so far, but is factored in to the current contract's price. That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Oil Rig © Cairn Energy

Col Gaddafi, crude euphoria & last 7 days

The moment Libyan rebels or the National Transitional Council (NTC) as the media loosely describes them, were seen getting a sniff around the Libyan capital Tripoli and Col. Gaddafi’s last bastion, some crude commentators went into euphoric overdrive. Not only did they commit the cardinal sin of discarding cautious optimism, they also belied the fact that they don’t know the Colonel and his cahoots at all. Well, neither does the Oilholic for that matter – at least not personally. However, history tells us that this belligerent, rambling dictator neither has nor will give up that easily. In fact at the moment, everyone is guessing where he is?

To begin, while the end is nigh for the Gaddafi regime, a return to normalcy of oil production outflows will take months if not years as strategic energy infrastructure was damaged, changed hands several times or in some cases both. As a consequence production, which has fallen from 1.5 million barrels per day (bpd) in February to just under 60,000 bpd according to OPEC, cannot be pumped-up with the flick of a switch or some sort of an industrial adrenaline shot.

In a note to clients, analysts at Goldman Sachs maintain their forecast that Libya's oil production will average 250,000 bpd over 2012 if hostilities end as "it will be challenging to bring the shut-in production back online."

These sentiments are being echoed in Italy according to the Oilholic's, a country whose refineries stand to gain the most in the EU if (and when) Libyan production returns to pre-conflict levels. All Italy’s foreign ministry has said so far is that it expects contracts held by Italian companies in Libya to be respected by “whoever” takes over from Gaddafi.

Now, compound this with the fact that a post-Gaddafi Libya is uncharted geopolitical territory and you are likely to get a short term muddle and a medium term riddle. Saudi (sour) crude has indirectly helped offset the Libyan (sweet) shortfall. The Saudis are likely to respond to an uptick in Libyan production when we arrive at that juncture. As such the risk premium in a Libyan context is to the upside for at least another six months, unless there is more clarity and an abrupt end to hostilities.

Moving away from Libya, in a key deal announced last week, Russia’s Lukoil and USA’s Baker Hughes inked a contract on Aug 16th for joint works on 23 new wells at Iraq's promising West Qurna Phase 2 oil field. In a statement, Lukoil noted that drilling will begin in the fourth quarter of this year and that the projected scope of work will be completed “within two years.”

While tech-specs jargon regarding the five rigs Baker Hughes will use to drill the wells at a depth exceeding 4,000 meters was made available, the statement was conspicuously low on the cost of the contract. The key objective is to bring the production in the range of 145,000 to 150,000 bpd by 2013.

Switching tack to commodity ETFs, according to early data for August (until 11th) compiled by Bloomberg and as reported by SGCIB, energy ETPs have attracted their first net inflows in five months with US$9.5 billion under management. This represents a net inflow of US$0.7 billion in August versus an outflow of US$1.5 billion recorded in January. Interest in precious metals continues, even after a very strong July, but base metal ETPs have returned to net outflows. (See adjoining table, click to enlarge)

Meanwhile, Moody’s has raised the Baseline Credit Assessment (BCA) of Russian state behemoth Gazprom to 10 (on a scale of 1 to 21 and equivalent to its Baa3 rating) from 11. Concurrently, the ratings agency affirmed the company's issuer rating at Baa1 with a stable outlook on Aug 17th. The rating announcement does not affect Gazprom's assigned senior unsecured issuer and debt ratings given the already assumed high level of support it receives from the Kremlin.

Moody's de facto regards Gazprom as a government-related issuer (GRI). Thus, the company's ratings incorporate uplift from its BCA of 10 and take into account the agency's assessment of a high level of implied state support and dependence. In fact raising Gazprom's BCA primarily reflects the company's strengthened fundamental credit profile as well as proven resilience to the challenging global economic environment and negative developments on the European gas market in 2009-10.

"Gazprom has a consistent track record of strong operational and financial performance, which was particularly tested in 2009 - a year characterised by lower demand for gas globally and domestically, as well as a generally less favourable pricing environment for hydrocarbons," says Victoria Maisuradze, Senior Credit Officer and lead analyst for Gazprom at Moody's.

Rounding-off closer to home, UK Customs – the HMRC – raided a farm on Aug 17th in Banbridge, County Down in Northern Ireland, where some idiots had set-up a laundering plant with the capacity to produce more than two million litres of illicit diesel per year and evade around £1.5 million in excise duty. Nearly 6,000 litres of fuel was seized and arrests made; but with distillate prices where they are no wonder some take risks both with their lives, that of others and the environment. And finally, Brent and WTI are maintaining US$100 and US$80 plus levels respectively for the last seven days.

© Gaurav Sharma 2011. Photo: Veneco Oil Pumps © National Geographic. Table: Global commodities ETPs © Société Générale CIB/Bloomberg Aug 2011. 

Crude mood swings, contagion & plenty of chatter

There is a lot going on at the moment for commentators to easily and conveniently adopt a bearish short term stance on the price of crude. Take the dismal US jobs data, Greek crisis, Irish ratings downgrade and fears of contagion to begin with. Combine this with a relatively stronger dollar, end of QE2 liquidity injections, the finances of Chinese local authorities and then some 50-odd Chinese corporates being questioned and finally the US political standoff with all eyes on the Aug 2 deal deadline or the unthinkable.

Additionally, everyone is second guessing what crude price the Saudis would be comfortable with and MENA supply fears are easing. Quite frankly, all of these factors may collectively do more for the cause of those wishing for bearish trends than the IEA’s announcement last month – no not the one about the Golden Age of gas, but the one about it being imperative to raid strategic petroleum reserves in order to ‘curb’ rising prices! The Oilholic remains bullish and is even more convinced that IEA’s move was unwarranted and so are his friends at JP Morgan.

In an investment note, they opined that the effectiveness of IEA’s coordinated release is a matter of some debate and crude prices have rebounded quickly. “But while the US especially has demonstrated a willingness to use oil reserves as a stimulus tool in what has become a rather limited toolbox, a second release will require higher prices and a far more arduous task to achieve unity,” they concluded.

Now, going beyond the short to medium term conjecture, the era of cheap oil, or shall we say cheap energy is fading and fast. An interesting report titled – A new world order: When demand overtakes supply – recently published by Société Générale analysts Véronique Riches-Flores and Loïc de Galzain confirms a chain of thought which is in the mind of many but few seldom talk of. Both analysts in question feel that the last long cycle, which extended from the middle of the 1980s to the middle of the 2000s, was shaped by an environment that strongly favoured the development of supply; the next era will in all likelihood be dictated by demand issues.

Furthermore, they note and the Oilholic quotes: “According to our estimates, energy demand will at least double if not triple over the next two decades. This is significantly more than the IEA is currently projecting, with the difference being mainly attributable to our projections for emerging world energy consumption per capita, which we estimate will considerably rise as these countries develop. Applied to the oil market, these projections mean that today’s proven oil reserves, which are currently expected to meet 45 years of global demand based on the present rate of production, would be exhausted within 15-22 years.”

IEA itself estimates that demand will grow by an average of 1.47 million barrels a day (bpd) in 2012, up from the current 2011 average of 1.2 million bpd. Moving away from crystal ball gazing, Bloomberg’s latest figures confirm that record outflows from commodity ETPs (ETF, ETC and ETN) observed in May slowed abruptly. According to SG Cross Asset Research apart from net inflows into precious metals – the biggest sub-segment measured by assets under management – other categories such as Energy and base metals saw limited net outflows (see table on the left, click to enlarge).

Meanwhile, the London Stock Exchange (LSE) was busy welcoming another new issuer of ETFs – Ossiam – on to its UK markets on Monday. It is already the largest ETF venue in Europe by number of issuers; 20 to be exact. According to a spokesperson there are 481 ETFs listed on the LSE. In H1 2010 there were 369,600 ETF trades worth a combined £19 billion on the Exchange's order book, a 40.3% and 33.5% increase respectively on the same period last year.

Switching to corporates and continuing with the LSE, today Ophir Energy plc was admitted to the Main Market. The company listed on the Premium segment of the Main Market and raised US$375 million at admission and has a market capitalisation of US$1.28 billion.

Ophir is an independent firm with assets in a number of African countries particularly Tanzania and Equatorial Guinea. Since its foundation in 2004, the company has acquired an extensive portfolio of exploration interests consisting of 17 projects in nine jurisdictions in Africa.

The company is one of the top five holders of deepwater exploration acreage in Africa in terms of net area and could be one to watch. So far it has made five discoveries of natural gas off Tanzania and Equatorial Guinea and has recently started drilling in the offshore Kora Prospect in the Senegal Guinea Bissau Common Zone. For the LSE itself, Ophir brings the number of companies with major operations in sub-Saharan Africa listed on its books to 79.

Across the pond, Vanguard Natural Resources (VNR) announced on Monday that it will buy the rest of Encore Energy Partners LP it does not already own for US$545 million, gaining full access to the latter’s oil-heavy reserves. While its shares fell 8% on the news, the Oilholic believes it is a positive statement of intent by VNR in line with moves made by other E&P companies to secure reserves with an eye on bullish demand forecasts over the medium term.

Meanwhile, a horror story with wider implications is unfolding in the US, as ExxonMobil’s Silvertip pipeline leaked oil into the Montana stretch of the Yellowstone River on July 1. The company estimates that almost 42,000 gallons may have leaked and invariably questions were again asked by environmentalists about the wisdom of giving the Keystone XL project the go-ahead. This is not what the US needed when President Obama was making all the right noises – crudely speaking that is.

In March, he expressed a desire to include Canadian and Mexican oil in the US energy mix, in May he said new leases would be sold each year in Alaska's National Petroleum Reserve, and oil and gas fields in the Atlantic Ocean would be evaluated as a high priority. To cap it all, last month, the President reaffirmed that despite the BP oil spill in the Gulf of Mexico in 2010, drilling there remained a core part of the country's future energy supply and new incentives would be offered for on and offshore development. Leases already held but affected by the President's drilling moratorium, imposed in wake of the BP spill, would be eligible for extensions, he added. The ExxonMobil leak may not impact the wider picture but will certainly darken the mood on Capitol Hill.

Russians and Norwegians have no hang-ups about crude prospection in inhospitable climates – i.e. the Arctic. Details are now emerging about an agreement signed by the two countries in June which came into effect on July 7. Under the terms, both countries’ state oil firms – i.e. Russia’s Gazprom and Norway’s Statoil – will divide up their shares of the Barents Sea. USGS estimates from 2008 suggest the Arctic was likely to hold 30% of the world's undiscovered gas and 13% of its oil.

Finally, Sugar Land, Texas-based Industrial Info Resources (IIR) came-up with some interesting findings on the Canadian oil sands. In a report last week, the research firm noted that Canada's Top 10 metals and minerals industry projects are large scale oil sands and metal mining endeavours, with the No. 1 being in Alberta's oil sands.

IIR observed that what was once considered a “large project” was now being dwarfed by “megaprojects”. Not long ago a project valued at CAD$1 billion was considered a mega project; now the norm is more in the region of CAD$5 billion (and above) for a project to earn that accolade. Not to mention the fact that the Canadian dollar has been stronger in relative terms in recent years and not necessarily suffering from a mild case of the Dutch disease like its Australian counterpart. IIR’s findings take the Oilholic nicely back to his visit to Calgary in March, a report he authored for Infrastructure Journal and a conversation he had with veteran legal expert Scott Rusty Miller based in Canada's oil capital. We concurred that while the oil sands developments face myriad challenges they are certainly on the way up. The Canadians are developers with scruples and permit healthy levels of outside scrutiny more than many (or perhaps any) other jurisdictions.

IIR recorded US$176 billion worth of oil sands projects and all of the projected investment capital, except for one project in Utah, is in Alberta. It is becoming more likely than ever that Prime Minister Stephen Harper’s dream of Canada becoming an energy super power will be realised sooner rather than later.

© Gaurav Sharma 2011. Photo 1: Pump Jacks Perryton, Texas © Joel Sartore, National Geographic. Photo 2: Shell Athabasca Oil Sands site work © Royal Dutch Shell. Table: Global Commodity ETPs: Inflows analysis by category © Société Générale July 2011.

Of PetroChina, Gazprom and Hackers!

But first...Brent remains well into US$100+ per barrel territory while WTI remains in sub-US$90 region. Let’s face it the Nymex WTI-ICE Brent spreads remain extremely weak and it is becoming a recurring theme. The front-month spread even capped -US$16 per barrel mark (US$16.29 to be exact) on Feb 11; the date of expiry of the Brent forward month futures contract.

Moving away from pricing, it emerged last week that Russia’s Gazprom reported a fall in profits from RUR173.5 billion to RUR160.5 billion; an annualised dip of 9% for the quarter from July to Sept 2010 period. The cost of purchasing oil and gas jumped 29% according to the state owned firm while operational costs rose 12%. Dip in profit even prompted Russian PM Putin to “ask” them to raise their game.

Elsewhere, the “All Hail Shale” brigade had to contend with PetroChina – the Chinese state-controlled energy firm – acquiring a 50% stake in a Canadian Shale Gas project run by Encana. The stake cost is pegged at a cool US$5.4 billion. PetroChina already has majority stakes in two oil projects in Canada with Encana. There doesn’t appear to be much of a ruckus about the Chinese shopping in Canada. I guess Canadians are less uptight about Chinese investment in perceived strategic energy assets than the Americans.

Finally, computer security firm McAfee claimed in a report published on February 10th that hackers have attacked networks of a number of oil and gas firms for a good few years now. The full report is available for downloading here and it makes for interesting reading. However, I am not entirely surprised by the revelations.

In a nutshell, McAfee claims that in a series of co-ordinated attempts at least a dozen multinational oil, gas and energy companies were targeted – named by it as Night Dragon attacks – which began in November 2009. Five firms have now confirmed the attacks, it adds.

© Gaurav Sharma 2011. Photo: Oil tanker © Michael S. Quinton/National Geographic Society