Examining a crude 2011 & talking Iran vs. 2012

As the Oilholic conjectured at the end of 2010, the year 2011 did indeed see Brent Crude at “around US$105 to US$110 a barrel”. However there was nothing ‘crudely’ predictable about 2011 itself – the oil markets faced stunted global economic growth, prospect of another few quarters of negative growth (which may still transpire) and a Greek crisis morphing into a full blown Eurozone crisis.

The Arab Spring also understandably had massive implications for the instability / risk premium in the price of crude over much of 2011. However, the impact of each country’s regional upheaval on the price was not uniform. The Oilholic summarised it as follows based on the perceived oil endowment (or the lack of it) for each country: Morocco (negligible), Algeria (marginal), Egypt (marginal), Tunisia (negligible), Bahrain (marginal), Iran and Libya (substantial).

Of the latter, when Libya imploded, Europe faced a serious threat of shortage of the country’s light sweet crude. But with Gaddafi gone and things limping back to normal, Libya has awarded crude oil supply contracts in 2012 to Glencore, Gunvor, Trafigura and Vitol. Of these Vitol helped in selling rebel-held crude during the civil war as the Oilholic noted in June.

Meanwhile Iran remains a troubling place and gives us the first debating point of 2012. It saw protests in 2011 but the regime held firm at the time of the Arab spring. However, in wake of its continued nuclear programme, recent sanctions have triggered a new wave of belligerence from the Iranian government including its intention to blockade the Straits of Hormuz. This raises the risk premium again and if, as expected a blanket ban by the EU on Iranian crude imports is announced, the trend for the crude price for Q1 2012 is decidedly bullish.

Société Générale's oil analyst Michael Wittner believes an EU embargo would possibly prompt an IEA strategic release. The price surge – directly related to the Saudi ability to mitigate the Iran effect – would dampen economic and oil demand growth. Market commentators believe an EU embargo is highly likely, especially after it reached an agreement in principle on an embargo on January 4th.

However, a more serious development would be if Iran carries out its threat to shut down the Straits of Hormuz, disrupting 15 million bpd of crude oil flows and we would expect Brent prices to spike into the US$150-200 range albeit for a limited time period according to Wittner.

“A credible threat from missiles, mines, or fast attack boats is all it would take for tanker insurers to stop coverage, which would halt tanker traffic. However, we believe that Iran would not be able to keep the Straits shut for longer than two weeks, due to a US-led military response. The disruption would definitely result in an IEA strategic release. The severe price spike would sharply hurt economic and oil demand growth, and from that standpoint, be self-correcting,” he adds.

Nonetheless, not many in the City see a “high” probability of such a step by Iran. Anyway, enough about Iran; lets resume our look back at 2011 and the release of strategic reserves would be a good joiner back to events of the past year.

Political pressure, which started building from April 2011, onwards saw the IEA ask its members to release an extra 60 million barrels of their oil stockpiles on to the world markets on June 23rd. The previous two occasions were the first gulf war (1991) and the aftermath of Hurricane Katrina (2005). That it happened given the political clamour for it is no surprise and whether or not one questions the wisdom behind the decision, it was a significant event.

For what it was worth, the market trend was already bearish at the time, Libya or no Libya. Concerns triggered by doubts about the US, EU and Chinese economies were aplenty as well as the end of QE2 liquidity injections coupled with high levels of non-commercial net length in the oil markets.

On the corporate front, refineries continued to struggle as expected with many major NOCs either divesting or planning to divest refining and marketing (R&M) assets. US major ConocoPhillips' announcement in July that it will be pursuing the separation of its exploration and production (E&P) and R&M businesses into two separate publicly traded corporations via a tax-free spin-off R&M co. to shareholders did not surprise the Oilholic – in fact it’s a sign of times.

Upstream remains inherently more attractive than the downstream business and the cliché of “high risk, high reward” resonates in the crude world. Continuing with the corporate theme, one has to hand it to ExxonMobil’s inimitable boss – Rex Tillerson – for successfully forging an Arctic tie-up with Rosneft so coveted by beleaguered rival BP.

On August 30th, 2011, beaming alongside Russian Prime Minister Vladimir Putin, Tillerson said the two firms will spend US$3.2 billion on deep sea exploration in the East Prinovozemelsky region of the Kara Sea. Russian portion of the Black Sea has also been thrown in the prospection pie for good measure as has the development of oil fields in Western Siberia.

The US oil giant described the said deal as among the most promising and least explored offshore areas globally “with high potential for liquids and gas.” If hearts at BP sank, so they should, as essentially the deal had components which it so coveted. However, a dispute with local partner TNK-BP first held up a BP-Rosneft tie-up and then finished it off.

One the pipelines front, the TransCanada Keystone XL project continues to be hit by delays and decision is not expected before the US presidential election; but the Oilholic feels the delay is not necessarily a bad thing. (Click here for thoughts)

The Oilholic saw M&A activity in the oil & gas sector over 2011 – especially corporate financed asset acquisitions – marginally exceeding pre-crisis deal valuation levels. Recent research for Infrastructure Journal – suggests the deal valuation figure for acquisition of oil & gas infrastructure assets, using September 30th as a cut-off date, is well above the total valuation for 2008, the year that the global credit squeeze meaningfully constricted capital flows.

Finally, on the subject of the good old oil benchmarks, since Q1 2009, Brent has been trading at premium to the WTI. This divergence has stood in recent weeks as both global benchmarks plummeted in wake of the recent economic malaise. WTI’s discount reached almost US$26 per barrel at one point in 2011.

Furthermore, waterborne crudes have also been following the general direction of Brent’s price. The Louisiana Light Sweet (LLS) increasingly takes its cue from Brent rather than the WTI, and has been for a while. Hence, Brent continues to reflect global conditions better.

Rounding things up, 2011 was a great year in terms of crude reading, travelling and speaking. Starting with the reading bit, 2011 saw the Oilholic read several books, but three particularly stood out; Daniel Yergin’s weighty volume - The Quest, Dan Dicker’s Oil’s Endless Bid and last but not the least Reuters’ in-house Oilholic Tom Bergin’s Spills & Spin.

Switching to crude travels away from London town, the Oilholic blogged from Calgary, Vancouver, Houston, San Francisco, Vienna, Dusseldorf, Bruges, Manama and Doha; the latter being the host city of the 20th World Petroleum Congress. The Congress itself and other signature events in the 2011 oil & gas calendar duly threw up several tangents for discussion.

Most notable among them were the two OPEC summits, the first in June which saw a complete disharmony among the cartel’s members followed by a calmer less acrimonious one in December where a unanimous decision to hold production at 30 million bpd was reached.

On the speaking circuit front, 2011 saw the Oilholic comment on CNBC, Indian and Chinese networks, OPEC webcasts and industry events, most notable among which was the Baker & McKenzie seminar at the World Petroleum Congress which was a memorable experience. That’s all for the moment folks. Here’s to 2012! Keep reading, keep it 'crude'!

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

Brent-WTI price divergence, OPEC & Eni

Since Q1 2009, Brent has been trading at premium to the WTI. This divergence has stood in recent weeks as both global benchmarks plummeted in wake of the recent economic malaise. WTI’s discount reached almost US$26 per barrel at one point. Furthermore, waterborne crudes have also been following the general direction of Brent’s price. The Louisiana Light Sweet (LLS) increasingly takes its cue from Brent rather than the WTI, and has been for a while. Its premium to WTI stood at US$26.75 in intraday on Wednesday.

The fact that Brent is more indicative of the global economic climate has gone beyond conjecture. OPEC has its own basket of crudes to look at, but got spooked on Wednesday as Brent dipped below the US$100 mark, albeit briefly and WTI came quite close to settling below US$75.50.

Iraq’s Deputy Prime Minister for energy, Hussain al-Shahristani, said that there was “no need” for the cartel to review its oil output at the next OPEC meeting (on December 14th in Vienna), but stopped shy of calling for a cut in oil production. Nonetheless, al-Shahristani did say that it would be “difficult” for his country to accept crude prices below the US$90 mark.

There also appears to be little appetite within the cartel to hold an emergency meeting and the Oilholic sees the chances of that happening being quite remote. If the oil price continues to slide, then it would be a different matter but quite simply a correction rather than a freefall would be the order of the day. On Thursday morning prices rose, aided by a weaker US Dollar, the US Fed’s indication of implementing further stimulus measures and the Bank of England’s move to initiate £75 billion worth of quantitative easing.

Sucden Financial research notes that after Tuesday’s bullish reversal, crude oil saw mixed trading early Wednesday as private reports about the US employment situation were mixed. Some optimism regarding more willingness to strike some solutions for the European debt issues seemed to underpin some trading as the euro generally maintained its gains.

“Technically, WTI futures may still have vulnerability toward the US$74 area but the recent gains have set technical potential for gains which could test toward US$83 area. Brent futures have technical patterns that may suggest tests of strength toward the area of US$106; supports may be expected near US$100 and US$95 areas,” Sucden notes further.

Whichever way you look at it, OPEC heavyweights led by Saudi Arabia, while not averse to cuts, have no appetite for an emergency meeting of the cartel as December is not that far away. Rounding things off, following Italy’s rating downgrade, it came as no surprise that debt ratings of Italian government-related issuers (GRIs) would be impacted, as Moody’s responded by downgrading the long term senior unsecured ratings of Italian energy firm Eni and its guaranteed subsidiaries to A1 from Aa3 and the senior unsecured rating of Eni USA Inc. to A2 from A1. The Prime-1 rating is unchanged.

Approximately €13.1 billion of long-term debt securities would be affected and the outlook for all ratings is negative. However, Moody’s notes that in the context of weakened sovereign creditworthiness, the likelihood of Eni receiving extraordinary support from the Italian government has significantly diminished.

Moody's has consequently removed the one-notch ratings uplift that had previously been incorporated into Eni's rating. It also added that Eni's A1 rating continues to reflect the group's solid business position as one of Europe's largest oil & gas companies.

“The group displays a sizeable portfolio of upstream assets that has been enhanced in recent years by a string of acquisitions. Looking ahead, the planned development of Eni's attractive pipeline of large-scale projects should help underpin its reserve base and production profile,” the agency concludes.

Eni, which is also Libya’s biggest producer, resumed production in the country for the first time since the uprising against Col. Moamar Gaddafi’s regime. A company source says it may begin exporting Libyan crude by the end of October or earlier.

© Gaurav Sharma 2011. Photo: Oil Drill Pump, North Dakota, USA © Phil Schermeister / National Geographic

Economic malaise & ratings agencies' crude talk

Not the time to say the Oilholic told you so – but the bears never left Crude town. They were merely taking a breather after mauling the oil futures market in the first week of August. It is a no brainer that existing conditions, i.e. fears of recessionary trends in the US, a slowdown in China and Eurozone’s debt fears, are spooking sentiment (again!).

At 14:30 GMT on Monday, ICE Brent crude forward month futures contract was down 1.5% or US$1.63 in intraday trading at US$110.70. Concurrently, WTI futures contract, weighed down more by a perceived American economic malaise, was down 2.8% or US$2.58 trading at US$84.27. Feedback from the city suggests reports of sluggish Chinese service sector growth are as much of a concern as a quarter or two of negativity in the US.

In fact, analysts at Commerzbank believe were it not for market sentiment factoring in possible measures by the US Federal Reserve to stimulate the economy, the WTI could have dipped even further. Additionally, the Libyan instability premium is fast on the verge of being factored out too even though its supply dynamic is far from returning to normalcy.

Société Générale analyst Jesper Dannesboe believes that Brent prices are exposed to a sharp drop down to US$100, or lower, before year-end as oil demand weakens and the market starts pricing in weak 2012 economic and oil demand growth.

“The recent sharp drop in leading indicators in Europe and the US suggest that demand destruction is likely to escalate, thereby resulting in significant drop in global oil demand growth. It is worth remembering that while Chinese demand growth is likely to remain solid, China still only account for about 11-12% of global oil consumption in absolute terms. In other words, the demand outlook in US and Europe remains a key driver of oil consumption, and therefore oil prices,” he wrote in a recent investment note.

All indications are that Société Générale’s Global head of oil research Mike Wittner will review his oil price forecast and will be publishing new lower oil demand and oil price forecast in the investment bank’s Commodity Review slated for publication on Sept 12. However, it is also worth moving away from pricing analysis to discuss what the perceived malaise means for the energy business; both Fitch Ratings and Moody’s have been at it.

In a report published on August 30, Fitch calculates that average oil and gas sector revenue growth will be 6%-7% in 2012, but considers that there is a 20% chance that sector revenue growth may actually be less than zero next year due to slower developed market macroeconomic growth that may also adversely impact oil prices. (Click image to enlarge). Jeffrey Woodruff, London-based Senior Director in Fitch's Energy and Utilities Team, notes, “A US real-GDP growth rate of around 1.8% and an average Brent oil price of US$90 per barrel in 2012 would likely make it a 50/50 chance as to whether or not average oil and gas sector revenue grows or contracts next year."

Fitch believes sector revenue growth in 2011 will average around 20% but is likely to slow to a low double-digit or even high single-digit growth rate thereafter. EBITDA growth tends to broadly follow the trend in revenue growth, but with more volatility. If sector average revenue growth slows to zero in 2012, sector average EBITDA growth is likely to be negative. The cash flow impact from such an event is likely to be modest for investment grade names, but would be more severe for companies with low speculative grade ratings that are more exposed to earnings volatility.

A slowing global economy and particularly weak US economic growth could negatively impact demand for oil for the remainder of 2011 and potentially into 2012. Fitch anticipates the overall rating impact of a slowdown in average sector revenue growth in 2012 will be minimal for investment grade names. However, for non-investment grade companies, it would be an entirely different matter. Fitch believes they would be more affected and the agency could revise rating Outlooks to Negative.

In a report also published on the same day by Moody’s, specifically on downstream, the agency notes that refining and marketing (R&M) sector has reached a peak in its business cycle, with limited prospects for improving from current levels over the next 12-18 months as capacity overtakes demand.

As result, the agency changed its outlook on the R&M sector to stable from positive, because of the considerable risk generated by upcoming capacity additions worldwide. The stable outlook means Moody's expects business conditions in the R&M sector neither to improve nor deteriorate significantly over the next 12-18 months. It last changed the R&M sector's outlook, to positive from stable, on March 31 this year.

Gretchen French, Moody's Vice President and Senior Analyst, expects global demand for gasoline and distillate to grow modestly through 2012, based on the agency’s central scenario of a sluggish global recovery. "However, a capacity glut could suppress margins across the R&M sector as early as 2012 if demand or capacity rationalisation fails to offset anticipated supply increases," she adds.

After all, nearly 2.4 million barrels per day (bpd) of new capacity is scheduled to come online worldwide in 2012. Currently, estimated global demand is only 1.6 million bpd in 2012. Moody’s reckons these concerns, coupled with elevated prices, continued high unemployment in the OECD, softer US or Eurozone economies, and inflation-stemming efforts in China could all dampen demand for refined products. Blimey! Did we leave anything out? The Oilholic bets the bears didn’t either.

On a related note, the latest Iraqi oil exports figures, released by country’s Oil Ministry, make for interesting reading. Data for July suggests total exports came in at 67.2 billion barrels down marginally from 68.2 billion in June. However, as oil prices rose over the corresponding period, revenue actually rose 2% netting the government US$7.31 billion with output currently pegged at around 2.17 bpd.

The total revenue to end-July came in at US$48.6 billion which does suggest that the country is on track to meet its revenue target of US$82.5 billion as stated in its February 2011 budget statement. However, given what is going on in the market at the moment, future crude price could be a concern. It seems the Iraqi budget is predicated at a price of US$76.50 a barrel. So there is nothing to worry about for them, for now!

Finally, here is an interesting CNBC segment on the town of Williston (North Dakota, USA) brought to the Oilholic’s attention, by a colleague who is from around those parts. He calls it Boomtown USA and it may not be that far from the truth!

© Gaurav Sharma 2011. Photo: Oil Refinery - Quebec, Canada © Michael Melford / National Geographic. Graph: Oil & Gas Sector average revenue growth rate © Fitch Ratings, London 2011.

Notes on a ‘Crude’ fortnight !

It has been a crude ol’ fortnight and there are loads of things to talk about. But first some “fused” thoughts from the Société Générale press boozer in London yesterday. There was consensus among crude commentators at the French investment bank most of whom asked that with commodities prices having been at or near record levels earlier this year, and subsequently subsiding only modestly, can anyone realistically say scribes or paranoid Western commentators are overstating the significance of China's presence in the global commodities markets? Nope! 

Additionally, should the existing commodities market conditions represent a bubble (of sorts); a deceleration in China could ultimately cause it to burst, they added. Most, but not all, also agreed with the Oilholic that IEA’s move to tap members’ strategic petroleum reserves (SPRs) may push Brent below US$100, but not US$90. At the moment it is doing neither. Finally, it is not yet time to hail shale beyond North America. Population concentration, politics and planning laws in Europe would make Poland a hell of a lot more difficult to tap than some American jurisdictions.

From an informal press party to a plethora of formal events at City law firms; of which there have been quite a few over the Q2 2011. Two of the better ones the Oilholic was invited to last quarter happened to be at Fulbright & Jaworski (May 10) and Clyde & Co (May 19).

The Fulbright event made Iraq and its “re-emergence” as an oil market as its central focus. Partners at the law firm, some of whom were in town from Houston, noted that since 2009 three petroleum licensing rounds have been held in Iraq with deals signed to cover of 51 billion barrels of reserves. There was enthusiastic chatter about the country’s ambitious plans to increase production from approximately 2.4 million barrels per day (bpd) to 12 million bpd by 2017. The Oilholic was also duly given a copy of the Legal guide to doing business in Iraq which regrettably he has so far not found the time to read.

Moving on, the Clyde & Co. event focussed on legal implications one year on from the BP Deepwater Horizon rig explosion. While much of the discussion was along predictable tangents, David Leckie and Georgina Crowhurst of Clyde & Co. drew an interesting comparison between the Piper Alpha tragedy of 1988 in the North Sea and the aftermath of the Gulf of Mexico spill. Agreed that regulatory regimes across the globe are fundamentally different, but observe this – Piper Alpha saw no corporate criminal prosecutions, no individual prosecutions and no top level political criticism. Deepwater Horizon will see FBI criminal and civil investigation, possible individual liability and we all remember President Obama’s “I am furious” remark. Shows how far we have come!

Continuing with Deepwater Horizon fiasco, met Tom Bergin last evening, a former broker turned Reuters oil & gas correspondent and a familiar face in crude circles. His book on BP – the aptly titled Spills and Spin: The Inside Story of BP – is due to be released on July 7th. Admittedly, books on the subject and on BP are aplenty since the infamous mishap of April 20th, 2010 and business book critics call them a cottage industry. However, the Oilholic is really keen to read Bergin’s work as he believes that akin to Bethany “Is Enron Overpriced?” McLean and Peter Elkind’s book on the Enron scandal which was outstanding (and surrounded by a cacophony of average “accounts”); this title could be the real deal  on BP and the spill.

Bergin knows his game, waited to present his thoughts and research in the fullness of time instead of a hurriedly scrambled “make a quick buck” work, has followed the oil major in question and the wider market for a while and has unique access to those close to the incident. Watch this space for a review!

Now, on to pricing and industry outlooks – nothing has happened since the Oilholic’s last blog on June 23rd that merits a crude change of conjecture. IEA’s move to tap in to members’ SPRs will not push Brent’s forward month futures contract below US$90 over the medium term. Feel free to send hate mail if it does! Analysts at ratings agency Moody's believe that (i) ongoing unrest in parts of the Middle East and North Africa (MENA); (ii) protracted supply disruptions in Libya; and (iii) lingering questions about OPEC supply are likely to keep crude at premium prices over the next 12-18 months.

In the past week, the press has received some ballpark figures from the agency. The release of 60 million barrels will take place in this month – but this will not be a straight cut case of two million bpd; the actual release will be much slower. The breakdown, as per IEA communiqués, will be -

• USA: 30 million barrels (or 50% of the quota comprising largely of light sweet with delivery of their lot to be complete by the end of August), 
• Europe: 18 million barrels (30%)
• Asia: 12 million barrels (20%)

Finally, the British Bankers Association (BBA) conference last week also touched on crude matters. Gerard Lyons, Chief Economist & Group head of Global Research at Standard Chartered opined that Western economies are two years into a recovery and that growth prospects are far better in the East than in the West. Hence, he also expects energy prices to firm up next year.

Douglas Flint, Group Chairman of HSBC Holdings noted that China is now a major destination for Middle Eastern exports (to be read oil and gas, as there is little else). So we’re back where we started this post – in the East that is!

© Gaurav Sharma 2011. Photo: Pipeline in Alaska © Michael S. Quinton, National Geographic

OPEC’s 'problem' and Dr. Chalabi’s book

The decision or rather non-decision of not raising the OPEC production quota taken earlier here in Vienna is as damaging for OPEC as it is problematic. A cartel is supposed to show solidarity, but internal sparring awaited the world’s press. The meeting even concluded without a formal production decision or even a communiqué.

It is clear now that those members in favour of a rise in production quota were Saudi Arabia, Kuwait, Qatar and UAE while those against were Algeria, Libya (Gaddafi’s lot), Angola, Venezuela, Iran and Iraq. However, majority of the sparring was between the Saudis on one side and the Iranians and Venezuelans on the other. In the end, it was not only messy but made the cartel look increasingly dysfunctional and an archaic union heading slowly towards geopolitical insignificance. However, what appears on the face of it is not so straightforward.

To followers of crude matters, it is becoming increasingly clear that as in the past, the Saudis will act to raise their production unilaterally, more so because they left Vienna irked by what they saw as Iranian and Venezuelan belligerence. Furthermore, the cartel’s own spare capacity of around 4 million b/d is squarely in the hands of Saudi Arabia, Kuwait and UAE. Of these, the Saudis pumped an extra 200,000 b/d last month. Most analysts expect this to be mirrored in their June output and it would imply that the Saudis would be producing at least 1 m b/d over the now largely theoretic OPEC binding quota of 24.85 million b/d.

Almost 41% of the global crude oil output is in the hands of OPEC. If within this close-knit group, there is sparring between those with spare capacity and those without in full view of the world’s press then the cartel’s central purpose takes a hammering. Mighty worried about the negative impact of high prices on GDP growth of their potential export markets and by default on the growth of crude oil demand, the Saudis appeared to the Oilholic to be firm believers that it was in their interest to increase quotas and actual production – so they will raise their own.

Yet I do not totally agree with market conjecture that the “end of OPEC is nigh”. Neither does veteran market commentator Jason Schenker of Prestige Economics. He notes: “Some market mavens have heralded this event as 'The end of OPEC' or 'The beginning of the end of OPEC', we do not believe it. Although no formal production decision was reached, there are precedents for what has been going on with the organisation’s production. After all, the group quota was suspended at the peak of the last business cycle in 2008.”

“Furthermore, and more recently, the individual member county quotas were suspended last October. On a more practical note, group cohesion for affecting production and crude oil prices is less critical when the price of crude is over US$100 per barrel and the global economy is rising, along with oil demand. The division within OPEC is likely to heal, and we are confident that group cohesion will be seen again when prices fall,” he concludes.

Additionally with half of those at the table being newcomers to the job, the situation in Libya and their representative, and an Iranian ‘acting’ oil minister with no experience of OPEC negotiations or of ‘crude’ affairs (he was previously the country’s minister for sport) all combined to complicate the situation as well as infuriate the Saudis. This situation should not arise at the next meeting.

Now if all this has left you yearning for a slice of OPEC’s history – whether you are an observer, derider or admirer of the cartel – there is no better place to start than Dr. Fadhil Chalabi’s latest book Oil policies, oil myths: Observations of an OPEC insider.

If there is any such thing as a ringside view of the wheeling and dealing inside OPEC then Dr. Chalabi more than anyone else had that view. The Oilholic found his book, which serves as the author’s memoir of his time at OPEC as well as charts the history of OPEC and its policies, to be a thoroughly good read.

He was the deputy secretary general of OPEC from 1979-89 and its acting secretary general from 1983-88. The book is, in more ways than one, a coupling of an account of his time at OPEC and an objective analysis of what has transpired in the energy business over last four decades. Looking through either prism - both the book's "memoir aspect" as well as the author's charting of the history of OPEC and its policies, it comes across as a thoroughly good read.

The book is just over 300 pages split by 16 chapters over which the author offers his thoughts in some detail about why OPEC is relevant. He also sets about exploding a few myths about the cartel, what has shaped it and how it has impacted the wider industry as well as the global economy.

To substantiate his case, he offers facts, figures, graphics, a glossary and a noteworthy and useful chronology of key events affecting the oil industry. The world has come a long way from the days when the “Seven Sisters” simply posted the oil prices in Platt’s Oilgram news bulletins. The era of price volatility-free cheap oil ended with the price shock of 1973 in the author’s opinion, before which the world had scarcely heard of OPEC.

Gaddafi’s Libya, Saddam’s Iraq and Nasser’s Egypt are all there but the Oilholic found Chapter 7 narrating the episode when Carlos the Jackal struck OPEC (in 1975) to be riveting, for among the hostages taken by the Jackal was the author himself. The book understandably has many fans at OPEC and officials from member nations as seen in its endorsements. However, what makes it enjoyable is that it is no glorification or advert of the cartel.

Rather it is an objective analysis of how crude oil has shaped the diplomatic relations of OPEC members with the oil-consuming nations globally and by default how an oil exporting cartel’s presence triggered ancillary developments in the crude business. This includes changing the investment perspective of IOCs who began facing dominant NOCs. In summation, if you would like to probe the supposed opacity of OPEC, Dr. Chalabi’s book would be a good starting point.

© Gaurav Sharma 2011. Photo 1: OPEC Flag © Gaurav Sharma 2011, Photo 2: Cover: Oil Policies Oil Myths © I.B. Tauris Publishers. Book available here.

Arriving at the not so ‘Ordinary’ OPEC meeting

The Oilholic probably has to go back to Q1 2008 when an OPEC meeting last generated as much interest as the soon to be held 159th Ordinary meeting of the cartel here in Vienna. Interest of this magnitude usually gains traction when the cartel contemplates an alteration of production quotas. Initial signals are that come 1600 CET tomorrow, we could see a rise in the OPEC member nations’ quotas by 0.5 to 1.5 million b/d.

Such talk has intensified in the three weeks leading up to the meeting. OPEC’s May crude oil production report notes that the cartel’s total crude output was 28.99 million b/d. If Iraq, which is not subject to OPEC quotas at present, is excluded, then the production came in at 26.33 million b/d, or 1.5 million b/d higher than the quota of 24.8 million b/d as set in Q4 2008.

This begs the question, what would the increase be like in real terms – i.e. would it be an increase in paper targets (to which methinks not a lot of attention would or should be paid by the markets) or would it be an increase over the already existing, but not officially acknowledged physical production levels. If it is the latter, then that would be something and Société Générale's Mike Wittner reckons it would be a physical increment rather than a paper one.

Furthermore, in a note to clients, Wittner observes: “Before analysing what OPEC is thinking about, why it will probably increase quotas, and what the dangers are of doing so, it is very important to note the latest signal regarding the meeting. Early Monday evening (EST), it was reported that the Saudi-owned al-Hayat newspaper, based in London, quoted an unnamed source as saying that if OPEC decides to lift its output by more than 1 million b/d, Saudi Arabia’s production will reach about 10 million b/d during the summer period, when its domestic demand increases. This compares to around 8.9 - 9.0 million b/d in May, according to preliminary wire service estimates, with an increase of 0.2 - 0.3 million b/d expected in June, according to various sources."

The initial feelers here seem to be following the norm. The Saudis for instance, according to various media reports, would increase production anyway even if an increase is not announced. Approach of the others is more nuanced while some would suggest there are bigger factors at play rather than a straight cut decision on production.

Earlier today, following a meeting at 1600 CET, a ministerial monitoring sub-committee comprising of ministers from Algeria, Kuwait and Nigeria overseen by the OPEC secretariat proposed a 1 million b/d increment to the existing quotas. This could be a harbinger of what may follow tomorrow. However, few here expect anything other than stiff resistance to an increase in quotas by Iran and Venezuela.

Both countries have provided interesting sideshows. Iran's President Mahmoud Ahmadinejad sacked his oil minister and seized control of his ministry ahead of the meeting. He then appointed his close ally Mohammad Aliabadi as caretaker oil minister after parliament and Iran's constitutional watchdog said the president had no right to head the ministry.

Oilholic regrets that he knows little about the right honourable Aliabadi who has precious little experience of oily matters. Guess being greasily close to Ahmadinejad is a resume builder in that part of the world. Additionally, Venezuela is to complain about US sanctions on PDVSA.

Meanwhile, crude oil futures rose slightly either side of the pond following concerns that OPEC’s spare capacity will tighten pending on what happens tomorrow. OPEC had 5.94 million b/d in spare capacity in May, down 2.7 per cent from April, based on Bloomberg estimates. Spare capacity was 6.31 million barrels a day in March, the highest level since May 2009.

The official line from OPEC as of this evening is – “We’ll pump more if needs be.” But do we? Tracking arrivals of OPEC ministers in Austria one by one since 09:00 CET not one has said much about what may happen on this occasion. Based on past experience that is always a sign that something will happen.

© Gaurav Sharma 2011. Photo: Empty OPEC Press conference table © Gaurav Sharma 2011

Crude Oil prices & some governments

I have spent the last two weeks quizzing key crude commentators in US and Canada about what price of crude oil they feel would be conducive to business investment, sit well within the profitable extraction dynamic and last but certainly not the least won't harm the global economy.

Beginning with Canada, since there’s no empirical evidence of the Canadian Dollar having suffered from the Dutch disease, for the oil sands to be profitable – most Canadians remarked that a price circa of US$75 per barrel and not exceeding US$105 in the long term would be ideal. On the other hand, in the event of a price dive, especially an unlikely one that takes the price below US$40 per barrel would be a disaster for petro-investment in Canada. A frozen Bow River (pictured above) is ok for Calgarians, but an investment freeze certainly wont be!

The Americans came up with a slightly lower US$70-90 range based on consumption patterns. They acknowledge that should the price spike over the US$150 per barrel mark and stay in the US$120-150 range over the medium term, a realignment of consumption patterns would occur.

This begs the question – what have Middle Eastern governments budgeted for? Research by commentators at National Commercial Bank of Saudi Arabia, the Oilholics’ feedback from regional commentators and local media suggests the cumulative average would be US$65 per barrel. Iran and Iraq are likely to have budgeted at least US$10 above that, more so in the case of the former while Saudi Arabia (and maybe Kuwait) would have budgeted for US$5 (to US$10) below that.

Problem for the Oilholic is getting access to regional governments’ data. Asking various ministries in the Middle East and expecting a straight forward answer, with the notable exception of the UAE, is as unlikely as getting a Venezuelan official to give accurate inflation figures.

Meanwhile, price is not the only thing holding or promoting investment. For instance, the recent political unrest has meant that the Egypt Petroleum Corp. has delayed the Mostorod refinery construction until at least May. The reason is simple – some 20-odd participating banks, who arranged a US$2.6 billion loan facility want the interim government to reaffirm its commitment to the project, according to a lawyer close to the deal. The government, with all due respect, has quite a few reaffirmations to make.

© Gaurav Sharma 2011. Photo: Bow River, Calgary, Alberta, Canada © Gaurav Sharma, April 2011

No OPEC Production Change & No Surprise

As expected, no major surprises came out of OPEC's 158th Meeting in the Ecuadorian capital Quito where the cartel left its production quotas unchanged this weekend. Some four of the twelve oil ministers from member nations – namely those of Kuwait, Qatar, Nigeria and Iraq – did not even turn up and sent junior officials instead.

It was interesting listening to an APTV recording of a press conference prior to the commencement of the OPEC meeting wherein none other than the Saudi Arabian Oil Minister Ali al-Naimi told a media scrum, “You guys really worry too much about prices. They go up, they go down. What’s new?”

We ask only because there is the little matter of the price of black gold capping US$90 per barrel either side of the pond for the first time in two years. He predicted a few seconds later that there would be no increase in OPEC production and here we are a few days hence. Interestingly, on the same day as Naimi was chiding reporters in Quito, the Paris-based International Energy Agency (IEA) opined that OPEC may come under pressure over 2011 to raise production.

IEA currently expects oil demand in 2011 to rise by 1.3 million bpd; 260,000 bpd more than previously forecast. In an accompanying statement, it said, "Although economic concerns remain skewed to the downside, not least if current high prices begin to act as a drag on growth, more immediately demand could surprise to the upside."

Overall, Global oil supply reached 88.1 million barrels a day last month, hitherto its highest ever level. Furthermore, the IEA forecasts world demand to expand 1.5 per cent in 2011 to 88.8 million barrels a day, which if recorded would also be a record. Its medium term projections for world oil demand for 2009-2015 is an average rise of 1.4 million bpd each year; an increment from its June assessment.

© Gaurav Sharma 2010. Photo: OPEC Logo © Gaurav Sharma