Oil market fundamentals return with aplomb

The oil futures slide began even before Iran's muted response to the US bombing of its nuclear sites had ended on Monday. And the benchmarks tanked further still once a ceasefire between Israel and Iran took effect in the following session. 

That's because oil market fundamentals took hold the moment de-risking started, evaporating the so-called risk premium double quick. 

Prior to this week's declines, oil futures had risen 20% month-over-month. Those price gains have now almost entirely been lost. And so much so for the outlandish claims that Iran may shut the Strait of Hormuz, which was never going to happen as yours truly noted in a column for Forbes. 

Since the start of hostilities on June 13, the Oilholic has always maintained that if there was a swift end to the conflict - as has been the case - price will fall rapidly again. That's because the market remains well supplied with plenty of non-Middle Eastern, non-OPEC crude from Brazil, Canada, Guyana, Norway, and indeed - the US - still the world's number 1 producer of oil. 

If you believe global oil demand growth for 2025 to be in the region that's just a smidge north or south of 1 million barrels per day, that can be serviced by growth in non-OPEC production alone. And OPEC+ led by the Saudis and Russians is also pumping more in a fight for market share. 

It all points to a market surplus come the end of 2025, especially for light sweet crude. That itself points to oil prices heading lower, perhaps even below $60! Well that's all for the moment folks! More musings to follow soon. Keep reading, keep it here, keep it 'crude'! 

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© Gaurav Sharma 2025. Photo: Oil pump jack building block model at the AVEVA World 2023 Conference, Moscone Center, San Francisco, US © Gaurav Sharma, October 2023.

Crudely heading down uncharted 'dire straits'?

On Saturday night the Israel-Iran conflict, and its domino effect on the world's energy markets, took another twist after the US bombed Iranian nuclear facilities. 

The Americans dropped 14 “bunker buster” bombs against three nuclear facilities in Iran - Fordo, Natanz and Isfahan. The move came just over a week on from Israel's own campaign of attacks on Iran's nuclear and military targets began. Inevitably, Iran responded with retaliatory missile strikes of its own on Israel. 

But the latest escalation by the US takes the oil market into uncharted waters (or straits shall we say). Early on in Israel's campaign, many assumed Iran's oil and gas infrastructure would not be attacked. However, that myth was shattered after Israel attacked Shahran Oil Terminal in Tehran, and two natural gas fields that Iran shares with Qatar. 

It hinted at the possibility that the Israelis were in no mood to compromise. Thereafter, oil futures capped the $75 mark, and lurked some 20% above last month's levels using Brent as a benchmark. 

Unsurprisingly, old market chatter that Iran would somehow close or attempt to close the Strait of Hormuz has resurfaced, as yours truly discussed in an interview with Germany's ARD Radio 1 on Tuesday while out in the Middle East. 

The Oilholic also discussed the direction of the market with Turkiye's Anadolu News Agency noting that if the crisis persists and / or worsens, crude price points will have to recalibrate to a new normal around $80 per barrel Brent prices. However, if tensions or the conflict are quickly diffused, we could see a drop to $70 or below, as and when more normalized market fundamentals kick in once again.

The Oilholic also subsequently said in a BBC interview on Friday that the very fact we happen to be discussing oil breaching a $80 ceiling and not a $100 one is because the market remains well supplied ahead of the US summer driving season. 

It's also a perception helped in no small part by the Saudis via OPEC+ and a decision by the producers' group to raise production for three successive months. 

It's why the market has priced in a heightened level of near-term hostilities between Israel and Iran in as balanced a way as possible, without succumbing to unfounded conjecture or worse still an actual push toward $100 driven by paper bulls - especially now that chatter about Tehran blockading the Strait of Hormuz is all the rage again. 

So, here's yours truly's take via Forbes on why its something the Iranians have threatened to do since the 1980s, but have in actual fact never done or attempted even once, and remains a highly unlikely prospect despite any chatter of any sort. 

However, Iran-backed Houthi Rebels could make life difficult for energy shipping by resuming their attacks in the other strait - i.e. the Bab al-Mandab Strait on the Red Sea/Gulf of Aden. 

Of course, the Israel-Iran story still has some way to go. But the presence of a lot of non-OPEC oil is keeping somewhat of a lid on things. It's why in the small hours of the morning in Europe, and early morning trading in Asia on Monday, gains in the wake of the attack still remain muted at sub-$80 Brent crude prices. (02:00am BST)

Well that's all for the moment folks! More musings to follow soon. Keep reading, keep it here, keep it 'crude'! 

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© Gaurav Sharma 2025. Photo I: Oil production site. © Monika Wrangel / Pixabay, May 2015. Photo II: Energy Analyst Gaurav Sharma on BBC News channel. © BBC, June 2025. 

Bypassing the Strait of Hormuz from Fujairah

The Oilholic recently found himself roughly 127 km east of Dubai in the United Arab Emirate of Fujairah for a speaking engagement at the Gulf Intelligence Energy Markets Forum 2015.

Among a plethora of crucial subjects up for discussion at a time of low oil prices, much thought in a new place one hadn’t been to before, went towards pondering over an old critical topic – crude oil shipping lanes in the Middle East.

The region's geopolitical tensions have threatened to disrupt oil shipping and other maritime movements at various points over the last five years and counting, even though an actual maritime disruption thankfully hasn’t take place (so far). But whether it’s the Suez Canal, Bab al-Mandab Strait and the Strait of Hormuz, through which a fifth of the world’s oil passes, the threat of naval affray will ever go away.

Back in 2013, barely 12 months on from an Iranian threat to block the Strait of Hormuz, the Oilholic examined nascent mitigation measures to bypass that threat from Oman. However, one got a sense, that Omani overtures also had much to do with challenging nearby Dubai's dominance as a commercial port on the 'wrong' side of the Strait of Hormuz and prone to the Iranian threats.

To this effect, the Omanis are pumping billions into four of their ports – Muscat, Sohar, Salalah and lately Duqm – all of whom face the Gulf of Oman and won’t be affected in the highly unlikely event of the Strait becoming strife and blockade marred.

Of the four, Duqm, an erstwhile fishing village rather than a port, stands to benefit from a new refinery, petrochemical plant and beachfront hotels. However, the UAE’s trump card appears to be its own hub in the shape of Fujairah; the only one of the seven emirates with a coastline facing the Gulf of Oman. With oil-rich neighbour Abu Dhabi as its backer, few would bet against Fujairah.

Indeed, the sleepy and quaint Emirate has woken up, as deliberated by EMF 2015 delegates, with new highways, hotels, supermarkets, ancillary infrastructure - the works! It isn’t just another maritime outlet for the oil industry; storage and petrochemicals facilities are directly linked with over two decades of efforts (and counting) in getting Fujairah to where it is today in infrastructural terms, according to one delegate.

Abu Dhabi’s International Petroleum Investment Company (IPIC), the owner of CEPSA and minority stakeholder in Cosmo Oil and OMV and brains behind the $3.3 billion Habshan–Fujairah oil pipeline, is busy enhancing the now operational pipeline’s onstream capacity from 1.3 million barrels per day to 1.5 million bpd to eventually 2 million bpd. The idea is to pump more and more crude for dispatch avoiding passage of ADNOC cargo via the Persian Gulf. 

Oil storage volume is set to undergo an increment too. Gulf Petrochem, a key player in oil trading world is spending $60 million to boost its storage facilities at Fujairah.

PIC’s Fujairah Refinery project, currently on cards, will process domestic crude oil, including Murban and Upper Zakum, with ready storage and dispatch facilities. And of course, those playing contango would wonder if Fujairah and rival Omani ports could (in the not to distant future) provide a Middle Eastern storage hub to rival onshore storage elsewhere. Discussions with key EMF 2015 delegates under Chatham House Rules point to a high degree of optimism on the subject of enhanced storage in Middle East whether or not contango plays pay-off.

The Oilholic’s feelings are quite clear on contango plays - as one wrote in a Forbes column back in back in February, there will be gains, but those hoping for returns on par Gunvor’s handsome takings from 2008-09 are in for a disappointment. In the strictest sense, what the Omanis and Emiratis are attempting has little do with the current round of contango punts.

Senior ADNOC, Gulf Petrochem, IPIC executives, policymakers and others told this blogger that what’s afoot in Fujairah is about future proofing and providing the region with a world class facility to process, store and ship domestic crude. Everything else would be secondary.

In any case, by the time planned works and storage enhancements come onstream, the current contango play might well be over and done with! That's all from the UAE folks. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo 1: Gulf of Oman shoreline. Photo 2: Town Centre, Fujairah, UAE © Gaurav Sharma, September 2015.

On Bukha’s oil & the beauty of Khasab

The Oilholic finds himself roughly 27 km west of Khasab, here in Oman in the wilayat (district) of Bukha on the Musandam peninsula. This area has its own 'crude' place in the history of Omani oil & gas production.

Not far off its coastline is what the government has designated as offshore exploration Block 8 – a unique prospection zone in a country whose main production hubs are largely onshore.

What's more, according to a roughneck based here, both are 'beautiful' fields. Split into Bukha and West Bukha, in 1994 Block 8 apparently yielded gas condensate that was so high in quality (64°API), according to a Petroleum Directorate of Oman (PDO) spokesperson, that you can pretty much use it to run a car without refining (a sample is pictured above left)! No exaggeration, if you get the 'purity' standpoint.

Norway’s DNO International, under a remit from Muscat, is a major player here with two production fields. Its data indicates that production from West Bukha 2 and 3 fields currently averages 8,000 oil barrels per day as well as 27 million cubic feet of dry gas. All of this is sent via a 34 km pipeline for onshore processing at a plant located in Ras Al Khaimah, UAE. Furthermore, two additional wells – West Bukha 4 and 5 are in the pipeline, no pun intended.

Exciting times indeed for the Musandam Governorate (split from the rest of Oman by the UAE), which has of late started enjoying the prosperity seen in the rest of the country. Recent prosperity aside, this peninsula oozes history from ancient to modern when it comes to global trade. Market analysts should find it quite gripping – at least yours truly did!

Musandam juts out into the Strait of Hormuz, with the Persian Gulf on one side and the Sea of Oman on the other. Turn the clock or sundial back 5,000 years and you would have seen ships from ancient Oman (then known as Magan) sail between Mesopotamia and India. Magan’s traders knew about (and traded with) India well before the British, French and Portuguese traders ‘discovered’ the country. A museum exhibit offers a model of the vessels and charts the route (above right).

Local historians even suggest that interaction via sea routes took place with the Indus Valley Civilization on one side and modern day Egypt on the other. Fast forward to 2013, and you can easily spot oil tankers from any high vantage point – of which the peninsula provides several. Views of the Strait of Hormuz include tankers carrying their crude cargo out to the world as it is a crossing point for 90% of the Gulf's oil due to be shipped overseas (see below left).

As if by divine convenience – the most navigable bit lies in Omani territorial waters. To say that Musandam bears silent testimony to the history of global trade routes would be an understatement – it has actually shaped them. Roman Empire’s logs from the 2nd century mention the Cape of Musandam, as do Marco Polo’s from the 13th century.

The Portuguese occupied Musandam between 1515 and 1622 and the imposing Khasab Castle (see below) was built during the occupation. For just over four centuries, it has overlooked regional territorial waters and formed the focal point of the modern city of Khasab. After the defeat and expulsion of the Portuguese in the 17th century, the locals modified the castle to suit their defensive needs. Today, it is a modern day museum featuring several exhibits depicting the way of life in this enchanting part of Oman (see below right).

Targeted reinvestment of regional oil wealth by the administration of Sultan Qaboos bin Said Al Said has improved links between Khasab and the rest of Oman via air and sea. A local ferry service links Khasab to Muscat, as does a daily Oman Air flight. Sand, sun and sea on one side and mountains on the other, leave everything from hiking to snorkelling as a leisure option. And should you wish to spot dolphins, get a local tour guide to take you out to the sea!

There are a few local hotels, but the Golden Tulip Resort (now Atana), Khasab is the most impressive one in the area with great views of the waterfront from a poolside balcony and most of its rooms. It is also only a few minutes away from the Bassa Beach. There is a huge supermarket right next to Khasab Castle, with the sea-port terminal for a ferry to Muscat and Khasab airport for a flight close by! Right, that’s that for travel tips and observations. (Click below left for the sights minus the sound)

One tiny and somewhat darkly funny footnote though! A different kind of trade is also flourishing here which speaks volumes about the prosperity in Oman and the lack of it in sanction-squeezed Iran, whose coastline is barely 45 km across the Strait.

Using a decent pair of binoculars, the Oilholic spent a good few hours this evening noting how Iranian smugglers dock off the Port of Khasab (see below right for an aerial view) and conduct a 'cash and carry' trade. First off, differentiating a decidedly tacky Iranian boat from an Omani Dhow or a local motorboat is quite easy. The smugglers' communication method is rather rudimentary including a signalling system involving a combination of torchlights and car headlights. As for the cargo, do not be alarmed – it includes things as non-sinister as western branded biscuits, stimulants such as tea, coffee and cigarettes and of course dodgy satellite TV recorders.

By playing the dumb tourist card, the Oilholic got a local boatman to reveal that the trade route used here is a 50 minute motor-boat ride between Khasab and Qeshm Island, Iran and then on to the Iranian mainland. Most of the activity takes place from sunset onwards. But this desperate activity, which is lucrative for some, is also mighty dangerous.

Cross-crossing one of the busiest shipping lanes in the dark with no lights to avoid detection is fraught with danger. Storms often claim lives, as do unreported collisions with tankers and containers ships. Yet, driven by the desire to make a quick buck out of the cravings of a sanction squeezed Iran, the smugglers keep coming. Warehouses hoard until the price of a particular commodity is high enough in Iran and lo and behold a buyer usually arrives in the dark of the night.

Surprisingly, some of the smugglers or "shooties" (as they would be called were you to translate literally from Farsi), happen to be women! The Oilholic can personally vouch for it with a fair bit of disbelief! One is all for gender equality - but this is something else. Don't know about the Iranian side, but not many on the Omani side seem to mind the shooties plying their trade. If caught offshore by the Omani authorities the pretext of "fishing" usually gets the shooties away!

The traders of Musandam have been a very resourceful lot for centuries. In the 21st century, legal or not, sanctions have driven Iranians to a different, dangerous kind of resourcefulness. While illegal, it certainly is tenacious. Speaking of a more formal dialogue between Iran and Oman, Sultan Qaboos has become among the first world leaders to interact with Iran’s new president – Dr Hassan Rouhani. The Sultan, who is often seen as a bridge between the West and the Islamic Republic, oversaw the signing of a memorandum of understanding between Tehran and Muscat, which would see the latter export natural gas to Oman in a 25-year deal with a US$60 billion valuation.

While further details are yet to be formally announced, the transportation of natural gas would involve pulling a pipeline from Iran to Oman under the Sea of Oman, east of the Strait of Hormuz. Local media reports suggest that the deal would be the largest (by valuation) between the two nations. Sadly that’s all from Khasab folks as the Oilholic packs his bags for a short overnight stay in Muscat before the flight home to London. More from Oman later, in the meantime keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo 1: Bukha oil on display in Khasab, Oman. Photo 2: Model of Mesopotamian ships. Photo 3: Oil tankers in the Strait of Hormuz. Photo 4: Khasab Castle. Photo 5: Collage of sights in Khasab. Photo 6: Port of Khasab as seen from Oman Air flight 917 © Gaurav Sharma, August 2013.

The Strait of Hormuz & Omani moves

The view of the Strait of Hormuz (pictured left) from the Musandam Peninsula is amazing. Let's face it - it's easier for the Oilholic to check it out here from the Omani side, rather than the Iranian side as the latter is not the most welcoming place for bloggers in general 'crude' or 'refined'. Not that yours truly has as of yet requested the Islamic Republic to issue him a visa.

As the world frets about Egyptian problems affecting oil tanker (and other) traffic from the Suez Canal, the Omanis are doing their utmost to mitigate one other potential threat – the one from Iran to close the Strait to oil traffic, should it be provoked by the West. The country is investing heavily in improvements and new build of its ports infrastructure.

The idea is to challenge nearby Dubai's dominance as a port hub and that too on the 'wrong' side of the Strait and prone to the Iran effect. Were you to look at a regional map, you'd find that all four of Oman's sea-port hubs/developments currently seeing investment (Muscat, Sohar, Salalah and lately Duqm) won't be affected in the highly unlikely event of the Strait becoming strife and blockade marred.

Of the four ports named above - Duqm, an erstwhile fishing village rather than a port, starts afresh complete with a new refinery, petrochemical plant, beachfront hotels and well, housing too. Billions are being invested in Duqm, with a figure nearing US$2 billion-plus being touted around.

Mitigating the Iranian threat is not foremost on Omani minds. This country has always maintained a balance between the West and Iran. In fact, the Sultan of Oman Qaboos bin Said Al Said is currently on a private visit to Iran and has announced fresh oil & gas sector co-operation between the two countries. However, diversifying Oman's economy away from oil & gas most certainly is on the nation's policy planning cards.

Aside from sea-ports, the government also wants Muscat International airport to rival Abu Dhabi and Dubai as an air transit point and aviation hub. The government's airport operator, Oman Airports Management, plans to award a dozen contracts this year and in 2014 to upgrade airport facilities in the capital city of Muscat (See above, click image to enlarge - for the current Muscat Airport terminal, ongoing construction work for the new one and an artist's impression of what it would look like in the future) along with Salalah. Additionally, the flag carrier Oman Air has ordered $2.5 billion worth of swanky new planes, according to a spokesperson.

However, the Oman government has made it abundantly clear that it wants to maintain the country's rustic charm, charcter and its points of differentiation from regional neighbours. So there won't be a mad Dubai-styled commercial rush. Afterall, standing out from the crowd is a unique selling point - so why ditch it? The Oilholic is certainly sold, blown away by the beauty of Musandam Peninsula and his first evening in Khasab before heading back to Muscat.

It's been an amazing experience from spotting oil tankers to mountain goats, soaking the sunshine to enjoying the mountainous views and beaches that are natural and not made of imported sand as is the case with Dubai. Even the Emiratis are suitably impressed, vindicated by the fact that UAE nationals are the biggest overseas buyers of Omani residential real estate, according to locals here. Officially speaking, Oman's Ministry of Housing said that of the 3,376 property sale deeds distributed to GCC nationals last year, Emirati buyers accounted for 1,694 titles.

Speaking of Emiratis buying things, Etihad Airways' sudden acquisition of a 49% stake in Serbia’s JAT and the latter's subsequent rebranding into Air Serbia has a strange ring to it. It's not that Etihad can’t make acquisitions and buy stakes! In fact, far from it – the airline already has stakes in Virgin Australia, Air Berlin, Aer Lingus, Air Seychelles and Jet Airways.

It's just that Abu Dhabi Crown Prince Sheikh Mohammed Bin Zayed Bin Sultan Al Nahyan has of late been professing his love for the Balkan country. The Emirate's investment vehicle Mubadala is also actively sniffing around all things Serbian from agricultural assets to hotels. However, its the timing the Oilholic is puzzled about and nothing else! For the record, Eithad denies any political pressure and or that either forays by His Majesty or the airline are related. That's all from the Musandam Peninsula for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2013. Photo 1: Straight of Hormuz, Khasab, Musandam Peninsula, Oman. Photo 2: Muscat airport collage (Left to right – Muscat Airport Terminal, Ongoing construction work at Muscat Airport, Artist’s impression of new Muscat airport) © Gaurav Sharma, August, 2013.

G7’s crude gripe, “Make oil prices dive”

As the Oilholic prepares to bid goodbye to Dubai, the G7 group of finance ministers have griped about rising oil prices and called on oil producing nations to up their production. They would rather have Dubai Mall’s Waterfall with Divers enclosure (pictured left) act as a metaphor for market direction! It is causing some consternation in this OPEC member jurisdiction and so it should.

 

First the facts – in a communiqué released on the US Treasury’s website yesterday, the G7 ministers say they are concerned about the impact of rising oil prices on the global economy and were prepared to act. Going one step further the ministers called on producing nations, most read OPEC, to act and now.

 

"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 statement notes. We have been here before back in March when American motorists were worried about prices at the pump and President Barack Obama was in a political quandary.

 

Now of course he is barely months away from a US Presidential election and here we are again. In fact the Canadians aside, all leaders elsewhere in the G7 are facing political pressure of some kind or the other related to the crude stuff too. Cue the statement and sabre rattling of releasing strategic petroleum reserves (SPRs)!

 

OPEC and non-OPEC producers' viewpoint, and with some reason, is that the market remains well supplied. Unfortunately plays around paper barrels and actual availability of physical barrels have both combined to create uncertainty in recent months.

 

On the face of it, at its last meeting OPEC – largely due to Saudi assertiveness – was seen producing above its set quota. Oil prices have spiked and dived, as the Oilholic noted earlier, but producers’ ability to change that is limited. Fear of the unknown is driving oil prices. As Saadallah Al Fathi, a former OPEC Secretariat staff member, notes in his recent Gulf News column, “prices seem to move against expectations, one way or another.”

 

Al Fathi further notes that the (West/Israel’s) confrontation with Iran is still on, but it is not expected to flare up. “Even the embargo on Iranian oil is slow to show in numbers, but may become more visible later,” he adds. While an oil shock following an Israeli attack on Iran could be made up by spare capacity, the room for another chance geopolitical complication or natural disaster would stretch the market. This is what spooks politicians, a US President in an election year and the market alike.

 

However, rather than talk of releasing SPRs for political ends now and as was the case in June 2011, the Oilholic has always advocated waiting for precisely such an emergency! While it has happened in the past, it is not as if producers have taken their foot off the production pedal to cash in on the prevailing bullish market trends at this particular juncture.

 

Away from G7’s gripe, regional oil futures benchmark – the Dubai Mercantile Exchange (DME) Oman Crude (OQD) – has caught this blogger’s eye. Oman’s production is roughly below 925,000 barrels per day (bpd) at present. For instance, in June it came in at 923,339 bpd. However, this relatively new benchmark is as much about Oman as Brent is about the UK. It is fast acquiring pan-regional acceptance and the November futures contract is seen mirroring Brent and OPEC basket crude prices. Its why the DME created the contract in the first place. Question is will it have global prowess as a 'third alternative' one day?

 

Elsewhere, the UAE has begun using the Abu Dhabi Crude Oil Pipeline (ADCOP). It will ultimately enable Abu Dhabi to export 70% of its crude stuff from Fujairah which is located on the Gulf of Oman bypassing the Strait of Hormuz and Iranian threats to close the passage in the process. However the 400km long pipeline, capable of transporting 1.5 million bpd, comes at a steep price of US$4 billion.

 

Sticking with the region, it seems Beirut is now the most expensive city to live in the Middle East according to Mercer’s 2012 Worldwide Cost of Living survey. It is followed by Abu Dhabi, Dubai (UAE), Amman (Jordan) and Riyadh (Saudi Arabia). On a global footing, Tokyo (Japan) tops the list followed by Luanda (Angola), Osaka (Japan), Moscow (Russia) and Geneva (Switzerland).

 

Meanwhile unlike the ambiguity over Dubai’s ratings status, Kuwait has maintained its AA rating from Fitch with a ‘stable’ outlook supported by rising oil prices and strong sovereign net foreign assets estimated by the agency in the region of US$323 billion in 2011.

 

Finally, on a day when the International Atomic Energy Agency (IAEA) says Iran has doubled production capacity at the Fordo nuclear site, Tehran has called for ridding the world of nuclear weapons at the Non Aligned Movement (NAM) summit claiming it has none and plans none. Yeah right! And  the Oilholic is dating Cindy Crawford! That’s all from Dubai folks; it’s time for the big flying bus home to London! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Waterfall at the Dubai Mall, UAE © Gaurav Sharma

The drivers, the forecasts & the ‘crude’ mood

At times wild swings in the crude market’s mood do not reflect oil supply and demand fundamentals. The fundamentals, barring a geopolitical mishap on a global scale, alter gradually unlike the volatile market sentiment. However, for most parts of Q2 and now Q3 this year, both have seemingly conspired in tandem to take the world’s crude benchmarks for a spike and dive ride.

 

Supply side analysts have had as much food for thought as those geopolitical observers overtly keen to factor in an instability risk premium in the oil price or macroeconomists expressing bearish sentiments courtesy dismal economic data from various crude consuming jurisdictions. For once, no one is wrong.

 

A Brent price nearing US$130 per barrel in mid-March (on the back of Iranian threats to close the Strait of Hormuz) plummeted to under US$90 by late June (following fears of an economic slowdown in China and India affecting consumption patterns). All the while, increasing volumes of Libyan oil was coming back on the crude market and the Saudis, in no mood to compromise at OPEC, were pumping more and more.

 

Then early in July, as the markets were digesting the highest Saudi production rate for nearly three decades, all the talk of Israel attacking Iran resurfaced while EU sanctions against the latter came into place. It also turned out that Chinese demand for the crude stuff was actually up by just under 3% for the first six months of 2012 on an annualised basis. Soon enough, Brent was again above the US$100 threshold (see graph on the right, click to enlarge).

 

Fast forward to the present date and the Syrian situation bears all the hallmarks of spilling over to the wider region. As the West led by the US and UK helps rebels opposed to President Bashar al-Assad, Russia is seen helping the incumbent; not least via a recent announcement concerning exchange of refined oil products from Russia for Syrian crude oil exports desperately needed by the latter.

 

A spread of hostilities to Lebanon, Jordan, Turkey and Iraq could complicate matters with the impact already having been seen in the bombing of Iraq-Turkey oil pipeline. Additionally, anecdotal evidence suggests the Saudis are now turning the taps down a bit in a bid to prop up the oil price and it appears to be working. The Oilholic will be probing this in detail on visit to the Middle East next week.

 

While abysmal economic data from the Old Continent may not provide fuel – no pun intended – to bullish trends, one key component of EU sanctions against Iran most certainly will. A spokesperson told the Oilholic that tankers insured by companies operating in EU jurisdictions will lose their coverage if they continue to carry Iranian oil from July.

 

Since 90% of the world's tanker fleet – including those behemoths called ‘supertankers’ passing through dangerous Gulf of Aden – is insured in Europe, the measure could take out between 0.8 and 1.1 million barrels per day (bpd) of Iranian oil from Q3 onwards according an Istanbul-based contact in the shipping business.

 

In fact OPEC’s output dipped by 70,000 bpd in month over month terms to 31.4 million bpd in July on the back of a 350,000 bpd drop in June over May. No prizes for guessing that of the 420,000 bpd production dip from May to July – 350,000 bpd loss is a direct result of the Iranian squeeze. Although Tehran claims it is a deliberate ploy.

With an average forecast of a rise in consumption by 1 million bpd over 2012 based on statements of various agencies and independent analysts, price spikes are inevitable despite a dire economic climate in Europe or the OECD in general.

 

Cast aside rubbish Iranian rhetoric and throw in momentary geopolitical supply setbacks like the odd Nigerian flare-up, a refinery fire in California or the growing number of attacks on pipeline infrastructure in Columbia. All of these examples have the potential to temporarily upset the apple cart if supply is tight.

 

“Furthermore, traders are wising up to fact that a price nudge upwards these days is contingent upon non-OECD consumption patterns and they hedge their bets accordingly. WTI aside, most global benchmarks look towards the motorist in Shanghai more than his counterpart in San Francisco these days,” says one industry insider of his peers.

 

When the Oilholic last checked at 1215 BST on August 23, the ICE Brent October contract due for expiry on September 13 was trading at US$115.95 while the NYMEX WTI was at US$97.81. It is highly likely that ICE Brent forward futures contracts for the remaining months of the year will end-up closing above US$110 per barrel, and almost certainly in three figures. Nonetheless, prepare for a rocky ride over Q4!

 

Moving away from pricing of the crude stuff, it seems the shutdown of Penglai 19-3 oilfield by the Chinese government in wake of an oil spill last year has hit CNOOC’s output and profits. According to a recent statement issued at Hong Kong Stock Exchange, CNOOC saw its H1 2012 output fall 4.6% on an annualised basis owing to Penglai 19-3 in which it holds 51% of the participating interest for the development and production phase. ConocoPhillips China Inc (COPC) is the junior partner in the venture.

 

This meant H1 2012 net income was down by 19% on an annualised basis from Yuan 39.34 billion to Yuan 31.87 billion (US$5 billion) according to Chief Executive Li Fanrong. CNOOC's US$15.1 billion takeover of Canada’s Nexen, a move which could have massive implications for the North Sea, is awaiting regulatory approval from Ottawa.

 

Away from the “third largest” of the big trio of rapidly expanding Chinese oil companies to a bit of good news, however temporary, for refiners either side of the pond. That’s if you are to believe investment bank UBS and consultancy Wood Mackenzie. UBS believes that for better parts of H1 2012, especially May and June, refining margins were at near “windfall levels” as the price of the crude stuff dipped in double-digit percentiles (25% at one point in the summer) while distillate prices held-up.

 

Wood Mackenzie also adds that given the refiners’ crude raw material was priced lower but petrol, diesel and other distillates remained pricey meant moderately complex refiners in northwest Europe made a profit of US$6.40 per barrel of processed light low sulphur Brent crude in June, compared with the average profit of 10 cents per barrel last year.

 

The June margin for medium, high sulphur Russian Urals crude was a profit of US$13.10 per barrel compared with the 2011 average of US$8.70, the consultancy adds. American refiners had a bit of respite as well over May and June. Having extensively researched refining investment and infrastructure for over two years, the Oilholic is in complete agreement with Société Générale analyst Mike Wittner that such margins are not going to last (see graph above, click to enlarge).

 

To begin with the French investment bank and most in the City expect global refinery runs to drop shortly and sharply to -1.3 million bpd in September versus August and -0.8 million bpd in October versus September. Société Générale also remains neutral on refining margins and expects them to weaken on the US Gulf Coast, Rotterdam and the Mediterranean but strengthen in Singapore. Yours truly will find out more in the Middle East next week. That’s all for the moment from London folks! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: Russian oil pump jacks © Lukoil. Graph 1: Comparison of world crude oil benchmarks (Source: ICE, NYMEX, SG). Graph 2: World cracking margins (US$/barrel 5 days m.a) © SG Cross Asset Research, August 2012.

Crude market’s health & farewell to the Bay Area

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

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

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

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

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

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

Analysts point to one or more of the following: 

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

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

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

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

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

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

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

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

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

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