OPEC’s Own Version of He Said, She Said…

Over each of last three years, in the run-up to the cartel's meeting, OPEC Secretary Secretary General Abdalla Salem El-Badri has tended not to give very much away. However, the 157th summit seems to be different; for over the last 6-12 months El-Badri has often stated that OPEC is comfortable with the crude oil price. In fact, he gave quite candid comments in June.

That said the price has remained in the circa of US$75 to US$85 per barrel and is heading higher as the US dollar has weakened in recent weeks. So El-Badri should indeed be comfortable with it.

But of course, no OPEC summit is complete with a bit of the old 'he said, she said'. The most important “he” in question is the Saudi oil minister Ali Al-Naimi who plainly told a media scrum here in Vienna on Wednesday that, and I quote, "Everyone" is happy with the market. To the market that reads like a coded signal he is against increasing output.

The only "she" on the table is of course Nigeria's petroleum minister - Diezani Kogbeni Alison-Madueke – who said OPEC (as always) will be looking at overproduction and non-adherence to quotas, at "this particular conference."

Sheikh Ahmed al-Abdullah al-Sabah of Kuwait when asked how the price of crude was at the moment, gave a short and sweet reply. Quite simply, he noted that, “It’s good.” Concurrently, Venezuelan Energy and Oil Minister Rafael Ramirez told a local TV network that "all" his colleagues agree they should leave the level of production stable.

Since arriving in Vienna, based on the 'he said, she said' rounds, I have had a jolly good natter with eight analysts here and a further three in London. All 11, as well as those at Société Générale expect a rollover in OPEC quotas and no change to actual output.

Finally as the forward month ICE Brent crude contract bounced to the stop-loss at US$84.55, analysts at Société Générale also believe a further range bound market is possible. "According to OPEC, the recent price rally does not reflect oil fundamentals (and we agree)," they wrote in an investment note.

© Gaurav Sharma 2010. Photo: © Shell

From a Sobering August to Sept's Crude Forecast!

August has been a sobering month of sorts for the crude market. Overall, the average drop in WTI crude for the month was well above 8% and the premium between Brent crude and WTI crude futures contracts averaged about US$2. The market perhaps needed a tempering of expectations; poor economic data and fears of a double-dip recession did just that.

Even healthy US jobs data released last week could not stem the decline; though prices did recover by about 2% towards the end of last week. On Friday, the crude contract for October delivery lost 0.6% or US$0.41 to $74.60 a barrel on NYMEX. This is by no means a full blown slump (yet!) given that last week’s US EIA report was bearish for crude. It suggests that stocks built-up by 3.4 million barrels, a figure which was above market consensus but less than that published by the API. This is reflected in the current level of crude oil prices.

Looking specifically at ICE Brent crude oil futures, technical analysts remain mildly bullish in general predicting a pause and then a recovery over the next three weeks. In an investment note discussing the ICE Brent crude oil contract for October delivery, Société Générale CIB commodities technical analyst Stephanie Aymés notes that at first the market should drift lower but US$74.40/73.90 will hold and the recovery will resume to 77.20 and 77.70/78.00 or even 78.80 (Click chart above).

On the NYMEX WTI forward month futures contract, Aymés also sees a recovery. “73.40 more importantly 72.60 will hold, a further recovery will develop to 75.55/90 and 76.45 or even 77.05/77.25,” she notes. By and large, technical charts from Société Générale or elsewhere are not terribly exciting at the moment with the price still generally trading pretty much within the US$70-80 range.

Elsewhere in the crude world, here is a brilliant article from BBC reporter Konstantin Rozhnov on how Russia’s recently announced privatisation drive is sparking fears of a return to the Yeltsin era sale of assets.

On a crudely related note, after a series of delays, Brazil’s Petrobras finally unveiled its plans to sell up to US$64.5 billion of new common and preference stock in one of the largest public share offerings in the world.

A company spokeswoman said on Friday that the price of new shares would be announced on September 23rd. The IPO could well be expanded from US$64.5 billion to US$74.7 billion subject to demand; though initially Petrobras would issue 2.17 billion common shares and 1.58 billion preferred shares. The share capital will finance development of offshore drilling in the country’s territorial waters.

Lastly, the US Navy and BP said late on Sunday that the Macondo well which spilled over 200 million gallons of oil into the Gulf of Mexico poses no further risk to the environment. Admiral Thad Allen, a US official leading the government’s efforts, made the announcement after engineers replaced a damaged valve on the sea bed.

Concurrently, The Sunday Times reported that BP had raised the target for its asset sales from US$30 billion to US$ 40 billion to cover the rising clean-up cost of the Gulf of Mexico oil spill. The paper, citing unnamed sources, also claimed that BP was revisiting the idea of selling a stake in its Alaskan assets.

© Gaurav Sharma 2010. Graphics © SGCIB / CQG Inc. Photo: Alaska, US © Kenneth Garrett / National Geographic Society

Alcohol & Oil Don’t Mix Well on the Trading Desk!

Unfortunately, some idiots learn the hard way that alcohol and trading do not mix all that well. The crude story doing the rounds in the City these past 24 hours is a mildly humorous one. That is unless you happen to be Steven Noel Perkins, a former futures trader at PVM Oil Futures Ltd. in London.

It seems that in the early hours of the morning on June 30, 2009 following a weekend (plus a Monday) of excessive drinking, the great Mr. Perkins went to his desk at PVM and placed a trade for ICE Brent crude futures contract (for August 2009 delivery) in excess of 7,000 lots representing nearly 7 million barrels of the crude stuff.

High on alcohol, the oil futures broker, whose job was to trade orders on an execution only basis at a firm which did no proprietary trading, accumulated a long outright position so substantial that the price of Brent spiked significantly over the course of the early session.

Perkins initially lied to his employer in order to try and cover up his unauthorised trading. But alas, no boss is that dumb. What’s more, the UK watchdog – the Financial Services Authority (FSA) – came down hard on him. It noted that Perkins' trading manipulated the market by giving a false and misleading impression as to the supply, demand and price of Brent crude and caused the price to increase to an abnormal and artificial level.

So in addition to losing his job, Perkins also got clobbered with a fine of £72,000 for market abuse. The FSA also banned him from working in the financial services industry.

Alexander Justham, director of markets at the FSA, said, "We view market manipulation extremely seriously. Perkins' trading caused disruption to the market and has been met with both a fine and prohibition. This reinforces the fact that a severe sanction will apply in cases of market manipulation, even where no profit is made. Perkins' drunkenness does not excuse his market abuse. He has been banned because he is not a fit and proper person to be involved in regulated activities and his behaviour posed a risk to the proper functioning of the market."

Oh dear! However, there is a silver lining. Immediately after the incident, Perkins joined a rehabilitation programme for alcoholics and has since stopped drinking. The FSA considers that it is possible that Perkins may be rehabilitated over time and could be fit and proper again in the future.

The ban has therefore been limited to a minimum term of 5 years, and his fine reduced from £150,000 to £72,000 resulting from a combination of not causing Perkins serious financial hardship as well as taking account of his desire to settle his case early under FSA's executive settlement procedures.

He’ll drink to that! Or maybe not!

© Gaurav Sharma 2010. Graphic © Gaurav Sharma 2010

Is Brent Winning Battle of the Indices?

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

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

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

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

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

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

© Gaurav Sharma 2010. Photo Courtesy © Royal Dutch Shell

London Oil Traders Maybe Humming “Let it Snow”

As some of the heaviest snowfall in history blanketed most of the UK and shows no sign of abating, traders with positions on Brent Crude Oil Futures in London would surely be in the mood for one of Dean Martin’s most famous songs.

On the back of the cold weather, ICE Brent crude oil contract for February delivery was trading at a 14-month high of $80.55 a barrel on the London-based ICE Futures Europe exchange earlier today; the highest this part of the world has seen since October 9, 2008.

Furthermore, it seems the chill and snow is likely to prevail across the British Isles, Scandinavia, much of Europe and parts Eastern United States and East Asia as well for some time yet. Hence, the price spike is likely to go further. A quick call to a contact of mine at Sucden Financial revealed that February ICE Brent crude contract’s discount to the comparable front-month U.S. crude contract was at $1.25 per barrel.

Looking ahead, my contact who wasn’t humming Let it Snow till I put the jingle in his head, said the February versus March Brent spread was at 64 cents. On technicals front, Brent support is at $75 a barrel while resistance is at $82 a barrel. His overall assessment is that the market would more than take a +$80 settlement on the back of a temporary spike provided by the cold weather, given the current “uncertain and fragile” recovery of the global economy.

Most in the City echo the sentiment. Harry Tchilinguirian, head of commodities derivatives research at BNP Paribas, said in a TV interview that the weather has helped to give crude prices a boost. However, he felt the supply situation, especially in the U.S. was more than adequate. Separately, Mike Wittner, Head of oil market research at Société Générale, also expressed a similar opinion.

Both commentators feel that once the snow blasts have disappeared, after having added their couple of dollars worth to the crude price, corrections could be sharp. Nothing lasts forever, until then Let it Snow!

© Gaurav Sharma 2010. Photo Copyright © Gaurav Sharma 2010