Resisting $40/bbl, Russia & some ‘crude’ ratings

Following two successive week-on-week declines of 6% or over, last Friday’s close brought some respite for Brent oil futures, although the WTI front month contract continued to extend losses. In fact, the US benchmark has been ending each Friday since June 12 at a lower level compared to the week before (see graph, click to enlarge).

 

Will a $40-floor breach happen? Yes. Will oil stay there? No. That’s because market fundamentals haven’t materially altered. Oversupply and lacklustre demand levels are broadly where they were in June. We still have around 1.1 to 1.3 million barrels per day (bpd) of extra oil in the market; a range that’s held for much of 2015. Influences such as Iran’s possible addition to the global crude oil supply pool and China not buying as much have been known for some time.

The latest market commotion is sentiment driven, and it’s why the Oilholic noted in a recent Forbes column that 2016-17 futures appear to be undervalued. People seem to be making calls on where we might be tomorrow based on the kerfuffle we are seeing today!

Each set of dire data from China, inventory report from the Energy Information Administration (EIA), or a gentle nudge from some country or the other welcoming Iran back to the market (as Switzerland did last week) has a reactive tug at benchmarks. The Oilholic still believes Brent will gradually creep up to $60-plus come the end of the year, with supply corrections coming in to the equation over the remainder of this year.

Away from pricing, there is one piece of very interesting backdated data. According to the EIA, Russia’s oil and gas sector weathered both the sanctions as well as the crude price decline rather well.

For 2014, Russia was the world's largest producer of crude oil, including lease condensate, and the second-largest producer of dry natural gas after the US. Russia exported more than 4.7 million bpd of crude oil and lease condensate in 2014, the EIA concluded based on customs data. Most of the exports, or 98% if you prefer percentages, went to Asian and European importers.

Where Russian production level would be at the end of 2015 remains the biggest market riddle. Anecdotal and empirical evidence points to conducive internal taxation keeping the industry going. However, as takings from oil and gas production and exports, account for more than half of Russia's federal budget revenue – it is costing the Kremlin.

Finally, two ratings notes from Fitch over the past fortnight are worth mentioning. The agency has revised its outlook on BP's long-term Issuer Default Rating (IDR) to ‘Positive’ from ‘Negative’ and affirmed the IDR at 'A'.

The outlook revision follows BP's announcement that it has reached an agreement in principle to settle federal, state and local Deepwater Horizon claims for $18.7bn, payable over 18 years. “We believe the deal has significantly reduced the uncertainty around BP's overall payments arising from the accident and hence has considerably strengthened the company's credit profile,” Fitch said.

The agency added there was a real possibility for an upgrade to 'A+' in the next 12 to 18 months, depending on how things pan out and BP's upstream business profile does not show any significant signs of weakening, such as falling reserves or production.

Elsewhere, and unsurprisingly, Fitch downgraded the beleaguered Afren to ‘D’ following the management's announcement on July 31 that it had taken steps to put the company into administration. The company's senior secured rating has been affirmed at 'C', and the Recovery Rating (RR) revised to 'RR5' from 'RR6'.

As discussions with creditors aimed at recapitalising the company failed, the appointment of administrators was made with the consent of the company's secured creditors who saw it as an “important step in preserving value of Afren's subsidiaries”. It is probably the only “value” left after a sorry tale of largely self-inflicted woes. That’s all for the moment folks, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graph: Oil benchmark Friday closes, Jan 2 to Aug 14, 2015 © Gaurav Sharma, August 2015.

The ostentatious & those 'crude' percentages

The Oilholic finds himself gazing at the bright lights of Las Vegas, Nevada once again after a gap of five years. This gambling hub's uniqueness is often the ostentatious and loud way it goes about itself. The oil market had its own fair share of loud and exaggerated assumptions last week.

Sample these headlines – “Brent spikes to 2015 high”, “Oil markets rally as shale production drops”, “Brent up 10%.” There is some truth in all of this, and the last one is technically correct. Brent did close last Friday up 10.03% relative to the Friday before, while WTI rose 8.41% and OPEC's basket of crude oil(s) rose 10.02% over a comparable period (see graph blow right hand corner).

Bullish yes, bull run nope! This blogger believes market fundamentals haven't materially altered. There is still too much crude oil out there. So what's afoot? Well, given that one is in a leading gambling hub of world, once 'the leading one' by revenue until Macau recently pinched the accolade, it is best to take a cue from punters of a different variety – some of the lot who've been betting on oil markets for decades out of the comfort of Nevada, but never ever turn up at the end of a pipeline to collect black gold.

Their verdict – those betting long are clutching at the straws after enduring a torrid first quarter of the year. Now who can blame the wider trading community for booking a bit of profit? But what's mildly amusing here is how percentages are interpreted by the media 'Las Vegas size', and fanned by traders "clutching at the straws", to quote one of their lot, 'Las Vegas style'.

For the moment, the Oilholic is sticking one's 2015 forecast – i.e. a mid-year equilibrium Brent price of $60 per barrel, followed by a gradual climb upwards to $75 towards the end of the year, if we are lucky and media speculation about the Chinese government buying more crude are borne out in reality. The Oilholic remains sceptical about the latter.

Since one put the forecast out there, many, especially over the last few weeks wrote back wondering if this blogger was being too pessimistic. Far from it, some of the oldest hands in the business known to the Oilholic, including our trader friends here in Las Vegas, actually opine that yours truly is being too optimistic!

The reasons are simple enough – making assumptions about the decline of US shale, as some are doing at the moment is daft! Make no mistake, Bakken is suffering, but Eagle Ford, according to very reliable anecdotal evidence and data from Drillinginfo, is doing pretty well for itself. Furthermore, in the Oilholic’s 10+ years of monitoring the industry, US shale explorers have always proved doubters wrong.

Beyond US shores – both Saudi and Russian production is still marginally above 10 million bpd. Finally, who, alas who, will tell the exaggerators to tackle the real elephant in the room – the actual demand for black gold. While the latter has shifted somewhat based on evidence of improved take-up by refiners as the so called “US driving season” approaches, emerging markets are not importing as much as they did if a quarter-on-quarter annualised conversion is carried out.

Quite frankly, all eyes are now on OPEC. Its own production is at a record high; it believes that US oil production won’t be at the level it is at now by December and its own clout as a swing producer is diminished (though not as severely as some would claim).

Meanwhile, Russian president Vladimir Putin declared the country's financial crisis to be over last week, but it seems Russia’s GDP fell between 2% to 4% over the first quarter of this year. The news caused further rumbles for the rouble which fell by around 4.5% last time one checked. The Oilholic still reckons; Russian production cannot be sustained at its current levels.

That said, giving credit where it is due – Russians have defied broader expectations of a decline so far. To a certain extent, and in a very different setting, Canada too has defied expectations, going by separate research put out by BMO Capital and the Canadian Association of Petroleum Producers. Fewer rigs in Canada have – again inserting the words 'so far' – not resulted in a dramatic reduction in Canadian production.

Finally, here's an interesting report from the Weekend FT (subscription required). It seems BP's activist shareholders have won a victory by persuading most shareholders to back a resolution obliging the oil major to set out the potential cost of climate change to its business. As if that's going to make a difference - somebody tell these activists the oil majors no longer control bulk of the world's oil – most of which is in the hands of National Oil Companies unwilling to give an inch!

That's all for the moment folks from Las Vegas folks, as the Oilholic turns his attention to the technology side of the energy business, with some fascinating insight coming up over the next few days from here. In the interim, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Paris Casino on the Las Vegas Strip, Nevada, USA © Gaurav Sharma, April 2015. Graph: Oil benchmark prices - latest Friday close © Gaurav Sharma, April 17, 2015.

Brent’s spike: Bring on that risk premium

Last week, the Brent forward-month futures contract was within touching distance of capping an 11-week high. On May 22, we saw the new July contract touch an intraday level of US$110.58; the highest since March 3. In fact, Brent, WTI as well as the OPEC crude basket prices are currently in 'three figure territory'.

Libyan geopolitical premium that's already priced in, is being supported by the Ukraine situation, and relatively positive PMI data coming out of China. Of these, if the latter is sustained, the Brent price spike instead of being a one-off would lend weight to a new support level. However, the Oilholic is not alone in the City in opining that one set of PMI data from China is not reason enough for upward revisions to the country's demand forecasts.

As for the traders' mindset the week before the recent melee, ICE's Commitments of Traders report for week of May 20 points to a significant amount of Brent buying as long positions were added while short positions were cut, leaving the net equation up by 15% on the week at 200,876. That's a mere 31,000 below the record from August 2013.

Away from crude pricing, S&P Capital IQ reckons private equity acquisitions in both the energy and utilities sectors are "poised for a comeback".

Its research indicates that to date this year, the value of global leveraged buyouts in the combined energy and utilities sectors is approaching $16 billion. The figure exceeds 2013's full-year total of $10 billion. Extrapolating current year energy and utility LBO deal value, 2014 is on pace for the biggest year for such deals since 2007, S&P Capital IQ adds (see table on left, click to enlarge).

Meanwhile, in its verdict on the Russo-Chinese 30-year natural gas supply contract, Fitch Ratings notes that Gazprom can go ahead with exporting eastwards without denting European exports. But since we are talking of 38 billion cubic metres (cm) of natural gas per annum from Gazprom to CNPC, many, including this blogger, have suggested the Kremlin is hedging its bets.

After all, the figure amounts to a quarter of the company's delivery quota to Europe. However, Fitch Ratings views it is as a case of Gazprom expanding its client portfolio, and for a company with vast untapped reserves in eastern Russia its basically good news.

In a recent note to clients, the ratings agency said: "Gazprom's challenge historically has been to find ways to monetise its 23 trillion cm reserves at acceptable prices – and the best scenario for the company is an increase in production. The deal is therefore positive for the company's medium to long term prospects, especially if it opens the door for a further deal to sell gas from its developed western fields to China in due course."

While pricing was not revealed, most industry observers put it at or above $350 per thousand cm. This is only marginally lower than Gazprom's 2013 contract price with its Western European customers penned at $378 per thousand cm. As for upfront investment, President Vladimir Putin announced a capital expenditure drive of $55 billion to boot. That should be enough to be getting on with it.

Just before one takes your leave, here's an interesting Reuters report by Catherine Ngai on why the 'sleepy market' for WTI delivery close to East Houston's refineries is (finally) beginning to wake up. That's all for the moment folks! Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Table: Global LBOs in the energy & utilities sector © S&P Capital IQ, May 2014.

A Russian deal, an Indian election, Libya & more

While the Europeans are busy squabbling about how to diversify their natural gas supplies and reduce reliance on Russia, the country's President Vladimir Putin hedged his bets earlier this week and reacted smartly by inking a 30-year supply deal with China.

No financial details were revealed and the two sides have been haggling over price for better parts of the last decade. However, yet again the Russian president has proved more astute than the duds in Brussels! Nevertheless, the Oilholic feels Russia would have had to make substantial compromises on price levels. By default, the Ukraine standoff has undoubtedly benefitted China National Petroleum Corp (CNPC), and Gazprom has a new gas hungry export destination.

Still there is some good news for the Europeans. Moody's believes that unlike in 2008-09, when gas prices spiked in the middle of the winter due to the cessation of Russian gas supplies to Europe via Ukraine, any temporary disruption via Ukraine would have only have a muted impact.

"This opinion factors in a combination of (1) lower reliance on Ukraine as a transit route, owing to alternative supply channels such as the Nord Stream pipeline which became operational in 2011; (2) low seasonal demand in Europe as winter has come to an end; and (3) gas inventories at high levels covering a full month of consumption," the ratings agency noted in a recent investment note.

Meanwhile, a political tsunami in India swept the country's Congress party led government out of power putting an end to years of fractious and economic stunting coalition politics in favour of a right-wing nationalist BJP government. The party's leader Narendra Modi delivered a thumping majority, which would give him the mandate to revive the country's economic fortunes without bothering to accommodate silly whims of coalition partners.

Modi was the chief minister of Gujarat, one of the country's most prosperous provinces and home to the largest in the refinery in the world in the shape of Jamnagar. In many analysts' eyes, regardless of his politics, the Prime Minister elect is a business friendly face.

Moody's analyst Vikas Halan expects that the new BJP-led government will increase natural gas prices, which would benefit upstream oil & gas companies and provide greater long term incentives for investment. Gas prices were originally scheduled to almost double in April, but the previous government put that increase on hold because of the elections.

This delay has meant that India's upstream companies have been losing large amounts of revenue, and a timely increase in gas prices would therefore cushion revenues and help revive interest in offshore exploration.

"A strong majority government would also increase the likelihood of structural reform in India's ailing power sector. Closer co-ordination between the central and state governments on clearances for mega projects and land use, two proposals outlined in the BJP's manifesto, would address investment delays," Halan added.

The Oilholic agrees with Moody's interpretation of the impact of BJP's victory, and with majority of the Indian masses who gave the Congress party a right royal kick. However, one is sad to see an end to the political career of Dr Manmohan Singh, a good man surrounded by rotten eggheads.

Over a distinguished career, Singh served as the governor of the Reserve Bank of India, and latterly as the country's finance minister credited with liberalising and opening up of the economy. From winning the Adam Smith Prize as a Cambridge University man, to finding his place in Time magazine's 100 most influential people in the world, Singh – whose signature appears on an older series of Indian banknotes (see right) – has always been, and will always be held in high regard.

Still seeing this sad end to a glittering career, almost makes yours truly wish Dr Singh had never entered the murky world of mainstream Indian politics in the first place. Also proves another point, that almost all political careers end in tears.

Away from Indian politics, Libyan oilfields of El Sharara, El Feel and Wafa, having a potential output level 500,000 barrels per day, are pumping out the crude stuff once again. However, this blogger is nonplussed because (a) not sure how long this will last before the next flare up and (b) unless Ras Lanuf and Sidra ports see a complete normalisation of crude exports, the market would remain sceptical. We're a long way away from the latter.

A day after the Libyan news emerged on May 14, the Brent forward month futures contract for June due for expiry the next day actually extended gains for a second day to settle 95 cents higher at US$110.19 a barrel, its highest settlement since April 24.

The July Brent contract, which became the forward-month contract on May 16, rose 77 cents to settle at US$109.31 a barrel. That's market scepticism for you right there? Let's face it; we have to contend with the Libyan risk remaining priced in for some time yet.

Just before taking your leave, a couple of very interesting articles to flag-up for you all. First off, here is Alan R. Elliott's brilliant piece in the Investor’s Business Daily comparing and contrasting fortunes of the WTI versus the LLS (Louisiana Light Sweet), and the whole waterborne crude pricing contrast Stateside.

Secondly, Claudia Cattaneo, a business columnist at The National Post, writes about UK political figures' recent visit to Canada and notes that if the Americans aren't increasing their take-up of Canada's energy resources, the British 'maybe' coming. Indeed, watch this space. That's all for the moment folks! Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com 

© Gaurav Sharma 2014. Photo: Pipeline, India © Cairn Energy

Crude thoughts from 141 West Jackson Blvd

A visit to Chicago would not be complete without setting foot inside 141 West Jackson Boulevard – the Chicago Board of Trade’s (CBOT) iconic abode – and gathering the pulse of the market straight from the world's oldest futures and options exchange. Over 50 different options and futures contracts are traded here, including ‘cruder’ ones, via close to 4000 member traders both electronically and through open outcrys; so plenty to observe and discuss.

There was only one man though whom the Oilholic had in mind – the inimitable Phil Flynn of Price Futures Group, veteran market analyst and the doyen of the business news broadcasters. The man from the “South Side” of Chicago has never been one to sit on the fence in all the years that yours truly has been mapping his market commentary. And he wasted no time in declaring that the WTI could reassert itself in the Battle of the Benchmarks pretty soon.

“First, let’s take the Brent-WTI differential into perspective. It narrowed to US$13 at one point today [March 28] and it will continue to narrow, albeit in fits and starts. We’ll come back to this point. WTI’s claw-back in terms of market stature could be down to simple nuts and bolts stuff! The US could – and I think will – become a treble impact jurisdiction – i.e. one of the world’s largest consumer, producer and exporters of crude oil somewhere between 2015-2018; if you believe the current market projections. So what could be a better way to get a sense of the global energy market than to have all of that rolled into one contract?”

Flynn reckons people were behind the curve in awarding Brent a victory in the Battle of the Benchmarks. “Everyone says these days that Brent is more reflective of global conditions. My take is that they should have reached this conclusion five years ago and it’d have been fine! Yet now when the clamour for Brent being the leading benchmark is growing, market supply and demand dynamics are changing for the better here in the US and for the worse in the North Sea.”

The veteran market commentator says the period of Brent being a global benchmark will be akin to the "rise and fall of the Roman Empire" through no fault of its champions but rather that of "late adopters" who missed the pulse of the market which was ticking differently back in 2007-08 with the rise of Asian crude oil consumption.

“There is a lot of politics in anointing the ‘favoured’ benchmark. As a trader I don’t care about the politics, I go with my gut instinct which tells me the problems associated with the WTI – for instance the Oklahoma glut – are being tackled while Brent’s are just beginning. WTI is liquid, has broad participation and also has the backdrop giving an indication of what supply and demand is. Therein, for me, lies the answer.”

Flynn also feels the technicals tell their own story. In December, he called a WTI low of US$85 and the top at US$97 and was vindicated. “It is flattering to look like some kind of a genius but it was pure technical analysis. I think there was a realisation that oil was undervalued at the end of 2012 (fiscal cliff, dollar-cross). When that went away, WTI had a nice seasonal bounce (add cold weather, improving US economy). It’s all about playing the technicals to a tee!”

Flynn sees the current WTI price as being close to a short-term top. “Now that’s a scary thing to say because we’re going into the refining season. It is so easy to say pop the WTI above US$100. But the more likely scenario is that there would a much greater resistance at about the price level where we are now.”

Were this to happen, both the Oilholic and Flynn were in agreement that there could be a further narrowing between Brent and WTI - a sort of “a meeting in the middle” with WTI price going up and Brent falling.

“The WTI charts look bullish but I still maintain that we are closer to the top. What drives the price up at this time of the year is the summer driving season. Usually, WTI climbs in March/April because the refiners are seen switching to summer time blends and are willing to pay-up for the higher quality crudes so that they can get the switchover done and make money on the margins,” he says.

His team at Price Futures (see right) feels the US seasonal factors are currently all out of whack. “We’ve recently had hurricanes, refinery fires, the Midwest glut, a temporary gas price spike – which means the run-up of gasoline prices that we see before Memorial Day has already happened! Additionally, upward pressure on the WTI contracts that we see in March/April may have already been alleviated because we had part of the refinery maintenance done early. So barring any major disasters we ‘may not’ get above US$100,” he adds.

As for the risk premium both here and across the pond, the CBOT man reckons we can consider it to be broadly neutral on the premise that a US$10 premium has already been priced in and has been for some time now.

“The Iran issue has been around for so long that it’s become a near permanent feature. The price of oil, as far as the risk premium goes, reflects the type of world that we live in; so we have an in-built risk premium every day.”

“Market wizards could, in theory, conjure up a new futures gimmick solely on the “risk premium in oil” – which could range between US$3 to US$20 were we to have a one! Right now we have a US$7 to US$10 premium “near” permanently locked in. So unless we see a major disruption to supply, that risk premium is now closer to 7 rather than 10. That’s not because the risks aren’t there, but because there is more supply back-up in case of an emergency,” he adds.

“Remember, Libya came into the risk picture only because of the perceived short supply of the (light sweet) quality of its crude. That was the last big risk driven volatility that we had. The other was when we were getting ready for the European embargo on Iranian crude exports,” he adds.

With the discussion done, Flynn, with his customary aplomb, remarked, “Let’s show you how trading is done the Chicago way.” That meant a visit down to the trading pit, something which alas has largely disappeared from London, excluding the London Metals Exchange.

While the CBOT was established in 1848, it has been at its 141 West Jackson Boulevard building since 1930 and so has the trading pit. “Just before the Easter break, volumes today [March 28] are predictably lower. I think the exchange record is 454 million contracts set 10 years ago,” says Flynn.

As we stepped into the pit, the din and energy on the floor was infectious. Then there was pin drop silence 10 seconds before the pit traders awaited a report due at 11:00 am sharp...followed by a loud groan.

“No need to look at the monitors – that was bearish all right; a groan would tell you that. With every futures contract, crude including, there would be someone who’s happy and someone who’s not. The next day the roles would be reversed and so it goes. You can take all your computers and all your tablets and all your Blackberries – this is trading as it should be,” says Flynn (standing here on the right with the Oilholic).

In July 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form the CME Group, a CME/Chicago Board of Trade Company, making it a bigger market beast than it was. Having last visited a rather docile trading pit in Asia, the Oilholic was truly privileged to have visited this iconic trading pit – the one where many feel it all began in earnest.

They say the Czar’s Russia first realised the value of refining Petroleum from crude oil, the British went about finding oil and making a business of it; but it is the United States of America that created a whole new industry model as we know it today! The inhabitants of this building in Chicago for better parts of 80 years can rightly claim “We’re the money” for that industry.

That’s all from the 141 West Jackson Boulevard folks! It was great being here and this blogger cannot thank Phil Flynn and Price Futures Group enough, not only for their time and hospitality, but for also granting access to observe both their trading room and the CBOT pit. More from Chicago coming up! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: The Chicago Board of Trade at West Jackson Boulevard (left) with the Federal Reserve Bank of Chicago (right), Chicago, USA. Photo 2: Phil Flynn (standing in the centre) with his colleagues at Price Futures Group. Photo 3: Phil Flynn (right) with the Oilholic (left) at the CBOT trading floor © Gaurav Sharma 2013.

‘Oh Frack’ for OPEC, ‘Yeah Frack’ for IEA?

In a space of a fortnight this month, both the IEA and OPEC raised “fracks” and figures. Not only that, a newly elected President Barack Obama declared his intentions to rid the USA of “foreign oil” and the media was awash with stories about American energy security permutations in wake of the shale bonanza. Alas, the whole lot forgot to raise one important point; more on that later.

 

Starting with OPEC, its year-end calendar publication – The World Oil Outlook – saw the oil exporters’ bloc acknowledge for the first time on November 8 that fracking and shale oil & gas prospection on a global scale would significantly alter the energy landscape as we know it. OPEC also cut its medium and long term global oil demand estimates and assumed an average crude oil price of US$100 per barrel over the medium term.

 

“Given recent significant increases in North American shale oil and shale gas production, it is now clear that these resources might play an increasingly important role in non-OPEC medium and long term supply prospects,” its report said.

 

The report added that shale oil will contribute 2 million barrels per day (bpd) towards global oil supply by 2020 and 3 million bpd by 2035. If this materialises, then the projected rate of incremental supply is over the daily output of some OPEC members and compares to the ‘official’ daily output (i.e. minus the illegal siphoning / theft) of Nigeria.

 

OPEC’s first acknowledgement of the impact of shale came attached with a caveat that over the medium term, shale oil would continue to come from North America only with other regions making “modest” contributions over the longer term at best. For the record, the Oilholic agrees with the sentiment and has held this belief for a while now based on detailed investigations in a journalistic capacity (about financing shale projects).

 

OPEC admitted that the global economy, especially the US economy, is expected to be less reliant on its members, who at present pump over a third of the world's oil and have around 80% of planet’s conventional crude reserves. Pay particular attention to the ‘conventional’ bit, yours truly will come back to it.

 

According to the exporters’ bloc, global demand would reach 92.9 million bpd by 2016, down over 1 million from its 2011 report. By 2035, it expects consumption to rise to 107.3 million bpd, over 2 million less than previous estimates. To put things into perspective, global demand in 2011 was 87.8 million bpd.

 

Partly, but not only, down to shale oil, non-OPEC output is expected to rise to 56.6 million bpd by 2016, up 4.2 million bpd from 2011, the report added. So OPEC expects demand for its crude to average 29.70 million bpd in 2016; much less than its current output (ex-Iraq).

 

"This downward revision, together with updated estimates of OPEC production capacity over the medium term, implies that OPEC crude oil spare capacity is expected to rise beyond 5 million bpd as early as 2013-14," OPEC said.

 

"Long term oil demand prospects have not only been affected by the medium term downward revisions, but by higher oil prices too…oil demand growth has a notable downside risk, especially in the first half of 2013. Much of this risk is attributed to not only the OECD, but also China and India," it added.

 

So on top of a medium term crude oil price assumption of US$100 per barrel (by its internal measure and OPEC basket of crudes, which usually follows Brent not WTI), the bloc forecasts the price to rise with inflation to US$120 by 2025 and US$155 by 2035.

 

Barely a week later, IEA Chief Economist Fatih Birol – who at this point in 2009 was discussing 'peak oil' – created ripples when he told a news conference in London that in his opinion the USA would overtake Russia as the biggest gas producer by a significant margin by 2015. Not only that, he told scribes here that by 2017, the USA would become the world's largest oil producer ahead of the Saudis and Russians. 

 

Realising the stirrings in the room, Birol added that he realised how “optimistic” the IEA forecasts were sounding given that the shale oil boom was a new phenomenon in relative terms.

 

"Light, tight oil resources are poorly known....If no new resources are discovered after 2020 and plus, if the prices are not as high as today, then we may see Saudi Arabia coming back and being the first producer again," he cautioned.

 

Earlier in the day, the IEA forecasted that US oil production would rise to 10 million bpd by 2015 and 11.1 million bpd in 2020 before slipping to 9.2 million bpd by 2035. It forecasted Saudi Arabia’s oil output to be 10.9 million bpd by 2015, 10.6 million bpd in 2020 but would rise to 12.3 million bpd by 2035.

 

That would see the world relying increasingly on OPEC after 2020 as, in addition to increases from Saudi Arabia, Iraq will account for 45% the growth in global oil production to 2035 and become the second-largest exporter, overtaking Russia.

 

The report also assumes a huge expansion in the Chinese economy, which the IEA said would overtake the USA in purchasing power parity soon after 2015 (and by 2020 using market exchange rates). It added that the share of coal in primary energy demand will fall only slightly by 2035. Fossil fuels in general will remain dominant in the global energy mix, supported by subsidies that, in 2011, rose by 30% to US$523 billion, due mainly to increases in the Middle East and North Africa.

 

Fresh from his re-election, President Obama promised to “rid America of foreign oil” in his victory speech prior to both the IEA and OPEC reports. An acknowledgement of the US shale bonanza by OPEC and a subsequent endorsement by IEA sent ‘crude’ cheers in US circles.

 

The US media, as expected, went into overdrive. One story – by ABC news – stood out in particular claiming to have stumbled on a shale oil find with more potential than all of OPEC. Not to mention, the environmentalists also took to the airwaves letting the great American public know about the dangers of fracking and how they shouldn’t lose sight of the environmental impact.

 

Rhetoric is fine, stats are fine and so are verbal jousts. However, one important question has bypassed several key commentators (bar some environmentalists). That being, just how many barrels are being used, to extract one fresh barrel? You bring that into the equation and unconventional prospection – including US and Canadian shale, Canadian oil sands and Brazil’s ultradeepwater exploration – all seem like expensive prepositions.

 

What’s more OPEC’s grip on conventional oil production, which is inherently cheaper than unconventional and is expected to remain so for sometime, suddenly sounds worthy of concern again.

 

Nonetheless “profound” changes are underway as both OPEC and IEA have acknowledged and those changes are very positive for US energy mix. Maybe, as The Economist noted in an editorial for its latest issue: “The biggest bonanza from all this new (US) energy would be if users paid the real cost of consuming oil and gas.”

 

What? Tax gasoline users more in the US of A? Keep dreaming sir! That’s all for the moment folks! Keep reading, keep it crude!

 

© Gaurav Sharma 2012. Oil prospection site, North Dakota, USA © Phil Schermeister / National Geographic.

Market chatter, luck of the Irish & East Timor

Rather than a daily assessment, the Oilholic often looks at how the forward month price of leading crude oil benchmarks fluctuates on a weekly basis. Such an exercise regularly provides interesting tangents for a discussion at the beginning of the week. Last Monday all three benchmarks – Brent, WTI and OPEC’s basket of crude – were in the red in week over week terms. This Monday, all three are in the green rising roughly between 2% and 3%. There is a clear reason for the upside momentum with Brent holding firm above US$114 per barrel and the WTI above US$90.

 

Better than expected Chinese economic data is largely behind the current market sentiment (see graphic above, click to enlarge). But as yours truly fast loses count of how many ‘critical’ EU summits we have recently had, another one is due towards the end of the week. So market caution will prevail either side of the pond. For Sucden Financial analyst Myrto Sokou, the two-day summit (this Thursday and Friday) and the regional Spanish elections (Galicia and Basque) will be the main focus for the week.

 

“We are not expecting any decision yet on Spain’s issues, with Reuters again suggesting that bundling multiple bailouts in one package is preferable, especially for Bundestag approval. Again the usual flow of Greek rumours, with some suggesting that the country needs two more years to implement reforms,” she added.

 

US EIA data released last Friday noted that American crude oil stocks built by 1.7 million barrels driven by a 193,000 barrels per day (bpd) increase in supply. This came from an import rise of 115,000 bpd and a domestic output rise of 78,000 bpd (to 6.598 million bpd). Concurrently, US refinery runs declined by 97,000 bpd, in line with the maintenance season and Cushing, Oklahoma stocks slightly gained by 0.3 million barrels (and are still comfortably above five year highs).

 

Société Générale analyst Mike Wittner felt the report indicated a typical pattern for a refinery maintenance season. “We see a very bullish backdrop for products and a bearish trend for crude…However, all products' fundamentals were very weak - both supply and demand. Recent positive US macroeconomic data might improve demand and add an upward pressure on prices,” he concluded.

 

Moving away from the price of the crude stuff, confirmation finally came that the Irish are about to hit black gold in meaningful quantities after many false dawns. This may largely be attributed to Providence Resources, a Dublin and London AiM dual-listed company, which first caught the Oilholic’s eye back in May.

 

The company’s chief executive Tony O’Reilly confirmed last week that its Barryroe site, 30 miles off the Cork coast, could potentially yield 280 million barrels of oil. He told the BBC that with Brent crude above US$100 per barrel at moment, the prospection offered a “lot of value” and would mark the beginning of the Irish oil industry.

 

While rules related to licensing, taxation and local job facilitation would still need to be worked on, what is transpiring at Providence is by all accounts a pivotal moment. "We hope there is a renaissance of interest by international companies who need to come to Ireland and help us to exploit our natural resources. We cannot do it alone," O’Reilly added.

 

ExxonMobil has already obliged by opting to explore a Providence site at Drumquin. Many others would surely follow given number of exploration licences the company currently holds according to its 2011 Annual report (see map of Providence Resources' licences above right, click to enlarge). Crossing over to the other side of the planet, East Timor or Timor Leste has created its domestic Institute of Petroleum and Geology (IPG) by means of its Decree-Law 33/2012 of July 18, 2012.

 

The new institute will be entrusted with archiving, producing, managing, storing and disseminating geological data, including that related to onshore and offshore oil, gas and mineral resources. Miranda Law Firm, which operates in the once strife ravaged jurisdiction, said the data collected and managed by IPG will provide the basis and impetus for domestic prospecting, exploration and production.

 

The problem is not so much of data collection hindering offshore prospection but one of defining East Timor’s maritime boundaries. It only became an independent state in May 2002. The new nation did not accept the Timor Gap Treaty of 1989, which divided the country’s resources between Australia and Indonesia. It was signed over a decade after Indonesia invaded East Timor in 1976 which had formerly been a Portuguese colonial outpost.

 

A new agreement – the Timor Sea Treaty of 2002 – then proposed a Joint Petroleum Development Area (JPDA) with a 90:10 oil & gas revenue share of new finds between East Timor and Australia. Then perhaps much to the chagrin of locals, Greater Sunrise Gas field – considered one of the most promising finds in the region – saw only a fifth of its nautical area within JPDA confines. As a consequence, only 18% of generated revenue currently falls in East Timor's lap according to sources in the Australian media. All the Oilholic can say is that if you need a crude talking point – talk East Timor.

 

Moving on from one post-conflict area to another supposedly post-conflict region – the Niger Delta – where Shell rejected the liability claims by four Nigerian farmers. At a civil court in The Hague, they have accused the Anglo-Dutch oil major of ruining their livelihood and causing damage to their land on account of oil spills. Shell for its part blamed sabotage and criminal theft by locals for the damage.

 

In a statement it said, "The real tragedy of the Niger Delta is the widespread and continual criminal activity, including sabotage, theft and illegal refining, that causes the vast majority of oil spills. It is this criminality which all organisations with an interest in Nigeria's future should focus their efforts on highlighting and addressing."

 

Opinion might well be divided, but this is the first instance of a half-Dutch multinational being taken to a civil court for an alleged offence caused outside the Netherlands. The only local connection is the Dutch arm of environmental group Friends of the Earth which is backing the four Nigerian farmers. While this landmark case is far from reaching its conclusion, if it has piqued your interest then Michael Peel’s brilliant book A Swamp Full of Dollars could give you all the background to the spills, the violence, the destruction and the crude world of Nigerian oil.

 

Finally, from the serious to the farcical – an episode was brought to the Oilholic’s attention by a colleague at industry scouting data and technical information provider Drillinginfo.  It seems Hollywood megastar Matt Damon’s latest foray – The Promised Land – widely touted as an anti-fracking response to US shale exploration is part bankrolled or rather will be brought to our screens “in association with” Image Media Abu Dhabi, a subsidiary of Abu Dhabi Media, according to the preview’s list of credits.

 

The media company is wholly owned by the government of UAE; an OPEC member country and one from which the US is hoping to cut its crude imports from based on the prospects of domestic shale exploration! It is best to leave it to you folks to draw your own conclusions, but that’s all for the moment! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Graphic 1: Forward month crude oil price © Sucden Financial, October 2012. Graphic 2: Providence Resources’ existing licences © Providence Resources Plc, December 2011

Crude profit taking & Browne’s Shale hypothesis

Concerns over a conflict in the Middle East involving Iran did ease off last week but apparently not far enough to prevent a further slide in the price of the crude stuff. A relative strengthening of the US dollar was also seen supporting prices to the upside despite Eurozone woes. So Brent resisted a slide below US$107 on Friday while the WTI resisted a slide below US$91 a barrel.

In fact, the WTI August contract reached a high of US$92.94 while Brent touched US$108.18 at one point; the highest for both benchmarks since May 22. This meant that the end of last week saw some good old fashioned profit taking with conditions being perfect for it.

However, on this crude Monday afternoon, we see both benchmarks dipping again. When the Oilholic last checked, Brent was resisting a slide below US$102 per barrel while the WTI was resisting a US$88 level. With the Middle East risk premium easing marginally, City traders have turned their attention to Spain.

Last week the country’s government predicted that the Spanish recession may well extend into next year. Additionally, the regional administration of Valencia asked for federal help from Madrid to balance its books. So what have we learnt over the last seven or eight trading sessions and what has changed? Well not much except that oil price forecasting often resembles an inexact task based on fickle market conjecture.

The bullish sentiments of last week were an aberration prompted by the perceived risk of a conflict in the Middle East which the Iranians would be incredibly barmy to trigger. Add the temporary lowering of oil production courtesy a Norwegian strike and you provide the legs to a perfect short term prancing bull!

Existing economic fundamentals and current supply demand scenarios did not merit last week’s pricing levels either side of the pond. The Oilholic agrees with the EIA’s opinion that the Brent price would indeed range between US$97.50 and US$99.50 a barrel up until the end of 2013. Analysts at investment banks and ratings agencies are also responding.

For instance, Société Générale has downgraded Brent price estimates by 10% over 2012-14, from US$117 a barrel to US$105. The French bank views oil market fundamentals as neutral for the rest of the year. Nonetheless, should the Brent price weaken below US$90, like others in the City, Société Générale says a Saudi response is to be expected.

For what it is worth, at least Brent’s premium to the WTI has been constantly taking a knock. By some traders' accounts, it is presently below US$15 a barrel for the September settlement contract having been at US$26.75 at one point over Q4 2011. As a direct consequence of the linkage between waterborne light sweet crudes, the Louisiana Light Sweet’s premium to the WTI is down as well to around US$16 a barrel according to Bloomberg.

Moving away from pricing, Lord Browne – the former boss of BP and a director of fracking firm Cuadrilla – believes shale prospection would rid the US of oil imports. Speaking in Oxford at the Resource 2012 forum on water, food and energy scarcity, Browne said the US will not need to import any crude within two decades.

He quipped that the amount of shale gas in the US was effectively “infinite". On a sombre note, Browne said, “Shale gas has a very bad reputation, as a result of the weak players cutting corners. Regulation tightening would be welcome."

His Lordship is known to be a member of the “All hail shale” brigade. Back in March he told The Independent newspaper that if fracking took off meaning fully in the UK, it could generate 50,000 British jobs. The country could very well need its own shale drive especially as a government watchdog recently warned of declining oil and gas revenues.

A consultation period is currently underway in London. All UK fracking activity ground to a halt last year, when a couple of minor quakes majorly spooked dwellers of Lancashire where Cuadrilla was test fracking. Given the incident and environmental constrictions, the Oilholic suspects that Lord Browne knows it is too early to get excited about shale from a British perspective. However, Americans see no cause for curbing their enthusiasm. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil tankers in English Bay, British Columbia, Canada © Gaurav Sharma 2012.

Price correction, Saudis hurt Canada & Russia!

Finally, we have a price correction which saw both global oil benchmarks reflect the wider macroeconomic climate accompanied by a dip in stock markets and a downgrade of 15 of the world’s largest banks by Moody’s. NYMEX WTI forward month futures contract fell below US$80 per barrel on Thursday for the first time since October 2011 while Brent is just about resisting the US$90-level trading at US$90.77 when last checked.

The benchmarks have shown bearish trends for almost three months but they were still not reflecting the wider macroeconomic climate; until yesterday that is. The ‘only way is up’ logic based on a linear supply-demand permutation oversimplifies the argument as the current situation demonstrates. Factors such as the absence of QE3 by the US Federal Reserve, a stronger US Dollar, and weaker Chinese, Indian and European data finally influenced market sentiment – not to provide the perfect storm but to provide the perfect reality! A decline in German business confidence levels reinforces bearish trends which will last for a while yet.

Despite negative sentiments and the possibility of Brent trading below US$100 per barrel for prolonged periods between now and Q1 2013, OPEC did not cut its quota last week. Saudi Arabia, which is so dominant within the cartel, actually wanted to send the price lower as it can contend with Brent falling to US$85 per barrel.

From a geopolitical standpoint, Saudis not only kicked a sanction hit Iran (maybe gleefully) but delivered bad news for Russia (perhaps intentionally) and Canada (almost certainly unwittingly). Saudi rivalry with Iran has more than a ‘crude’ dimension, but one with Russia almost certainly revolves around market dominance. The Oilholic’s hypothesis is that this intensified when Russian production first overtook Saudi production in 2009.

As the world’s leading producer for over two years, Moscow was causing Riyadh some discomfort. So the Saudis raised their game with the Libyan conflict and Iranian sanctions giving them ample excuses to do so. Constantly flouting OPEC production quotas, this February Saudi Arabia regained its top spot from Russia. Now with prices in reverse, it is the Russians who are sweating having rather bizarrely balanced their budget by factoring in an oil price in the circa of US$110 to US$120 per barrel.

Several independents, ratings agencies (for example S&P) and even former finance minister Alexei Kudrin repeatedly warned Russia about overreliance on oil. The sector accounts for nearly 70% of Russian exports and Vladimir Putin has done little to alter that dynamic both as prime minister and president in successive tenures.

Realising the Russian position was not going to change over the short term and with a near 10% (or above) dip in production at some of their major fields; the Saudis ramped up their production. A masterstroke or precisely a deft calculated hand played by Minister Ali Al-Naimi planked on the belief that amid bearish trends the Russians simply do not have the prowess, or in fact the incentive, to pump and dump more crude on the market has worked.

A Russian production rise to 10 million bpd is possible in theory, but very difficult to achieve in practice in this macroeconomic climate. So the markets (and the Saudis) expect Russia to fall back on their US$500 billion in reserves to balance the books over the short to medium term rather than ramp-up production. Furthermore, unless the Russians invest, the Saudis’ hand will only be strengthened and their status as ‘crude’ stimulus providers enhanced.

Canada’s oil sands business while not a direct Saudi target is indeed an accidental victim. The impact of a fall in the price of crude will also be very different as Canada’s economy is far more diversified than Russia’s. Instead of a decline in production, the ongoing oil sands and shale prospection points to a potential rise.

Canadian prospection remains positive for Canadian consumers and exporters alike; provincial and federal governments want it, justice wants it, PM wants it and the public certainly want it. However, developing the Athabasca oil sands and Canadian shale plays (as well as US’ Bakken play) is capital and labour intensive.

For the oil sands – holding the world’s second largest proven oil resource after Saudi Arabia’s Dhahran region – to be profitable, crude price should not plummet below US$60 per barrel. Three visits by the Oilholic to Calgary and interaction with colleagues at CAPP, advisory, legal and energy firms in Alberta between 2008 and 2011 threw up a few points worth reiterating amidst this current crude price correction phase. First of all, anecdotal evidence suggests that while it would rather not, Alberta’s provincial administration can even handle a price dip to US$35 to 40 per barrel.

Secondly, between Q2 2007 and Q1 2008 when the price of crude reached dizzy heights, oilfield services companies and engineering firms hired talent at top dollar only to fire six months later when the price actually did plummet to US$37 per barrel in wake of the financial crisis. Following a wave of redundancies, by 2010 Calgary and Fort McMurray were yet again witnessing a hiring frenzy. The cyclical nature of the industry means this is how things would be. Canadians remain committed to the oil & gas sector and in this blogger’s humble opinion can handle cyclical ups and downs better than the Russians.

Finally, Canada neither has a National Oil Company nor is it a member of any industry cartel; but for the sake of pure economics it too needs a price of about US$80 a barrel. On an even keel, when the price plummets or the Saudis indulge in tactical production manoeuvres, as is the case at present, you’d rather be a Canadian than a Russian.

The Oilholic has long suspected that the Saudis look upon the Canadians as fellow insurers working to prevent ‘oil demand destruction’ and vying for a slice of the American market; for them the Iranians and Russians are just market miscreants. That the market itself is mischievous and Canadians might join the 'miscreants' list if proposed North American pipelines come onstream is another matter! That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo 1: Russian pump jacks © Lukoil. Photo 2: Red Square, Moscow, Russia © Gaurav Sharma 2004. Photo 3: Downtown Calgary, Alberta, Canada © Gaurav Sharma 2011.

First vibes from OPEC, monthly data & Mr. Al-Naimi

The Oilholic is in Vienna ahead of the 161st meeting of OPEC ministers and the 5th OPEC International seminar; the latter being a forum where the great and good of this crude world interact with OPEC ministers and other invited dignitaries once every two years. However, even before the proceedings have begun, the cartel’s Monthly Market Report has stirred things up.

Back dated figures for April suggest, OPEC’s production for the month came in 32.964 million barrels per day (bpd) up 631,000 bpd from March. The figure for May came in lower at 31.58 million bpd; but still well above the cartel’s production cap of 30 million bpd. Such a high level has not been recorded since 2008 when the price of crude rose to a spectacular high only to fall sharply as the global financial crisis took hold. The data would suggest that together with non-OPEC sources, the market remains well supplied. Furthermore, in the face of economic uncertainty demand could drop as the economies of India and China show signs of medium term cooling.

On the subject of demand, OPEC notes, “The upcoming driving season might be affected by movements in retail gasoline prices and economic developments worldwide; hence, world oil demand would show a further decline and might see a cut of between 0.2 and 0.3 million bpd from the current forecast of the year's total growth (0.9 million)."

With leading benchmarks Brent and WTI falling below US$100 a barrel this week along with the OPEC basket price, some would think the Saudis would be keen to support a cut in the cartel’s production quota. Figures suggest OPEC's largest producer did in fact reduce its output to 9.8 million bpd in May from 10.1 million bpd in April. That is still the highest Saudi production rate on record for the last three years and the country recently reclaimed its top spot from Russia as the world’s largest producer of crude oil.

However, ahead of the OPEC meeting on June 14, the country’s inimitable oil minister Ali al-Naimi has jolted a few by actually calling for an increase in OPEC’s output. In an interview with the Gulf Oil Review (published by Bill Farren-Price’s Petroleum Policy Intelligence), he said, “Our actions have helped the oil price drop from US$128 in March to about $100 today which has acted as a type of stimulus to the European and world economy…Our analysis suggests that we will need a higher ceiling than currently exists."

"Given our large crude oil reserve situation, we certainly want to see a sustained market for crude oil over the long term. This calls for moderation, but on the other hand, with the cost of oil production going up...a reasonable price is required to ensure exploration can continue," he added.

Clearly the Saudis are on a collision course with other cartel members but since his interview al-Naimi has said he is “happy with the way things are”. Read what you will; we’ve been here before and such OPEC chatter is nothing new, except for the ‘stimulus’ hypothesis which has a nice ring to it. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: OPEC Logo on building exterior © Gaurav Sharma 2011.

Clinton in Crudeland, Ghanem’s death & Cressier

US secretary of state Hillary Clinton has been clocking up air miles trying to persuade India and China to import less of the crude stuff from Iran. While diplomatic issues dominated the headlines during her visit, Clinton is understood to have impressed upon the Chinese to lower Iranian imports. However, recent media reports suggest that instead of seeking alternative supplies away from Iran, the economic powerhouse is seeking alternative modes of payment to Tehran away from the US Dollar. First, Reuters cited Mohammed Reza Fayyad, Iran's ambassador to the United Arab Emirates, acknowledging that his country was accepting Yuan payments in kind for oil exports to China. Then the FT reported that China has been providing the Yuan to Iran via Russian banks rather than its own international banks.

Arriving next in India, Clinton had a similar message for New Delhi. She “commended” India for lowering its reliance on Iranian imports urging it to do more. However, as the Oilholic noted on his non-state visit to India earlier this year - Indian policymakers openly admit this is easier said than done. Meanwhile conspiracy theories about the death on April 29 of former Libyan Oil Minister Shokri Ghanem, whose body was found in the River Danube in Vienna, are unlikely to go away with his funeral held four days ago.

In June 2011, his defection from the Gaddafi regime was the epicentre of media gossip – both in the run-up to the 159th OPEC meeting as well as during the event itself where his defection relieved some and riled others. Some doubted his intentions while others doubted that he’d even defected.

All in public domain was that since his defection he had been living in Vienna with his family and working as a consultant. It seemed to be a natural choice since Ghanem’s connection with the city went back a few decades. He had held a number of posts at the old OPEC HQ in Vienna rising to its head of research in 1993 before joining the Gaddafi government first as Prime Minister and then Oil minister which marked his regular return to Vienna until last year.

The Oilholic’s sources in Vienna suggest the Austrian authorities have ruled out foul play. All yours truly knows is that a passer-by saw his body in the river and called the police who found no other documents on him other than business cards of his consultancy. There were no signs of violence on the body and it is thought that he died of natural causes. At the time of his death, he was setting up a business with another OPEC veteran - Algeria's Chakib Khelil and other investors.

However back home, the new government in Tripoli never trusted him despite his defection and was in fact preparing a court case against him for making illegal gains during his time in the Gaddafi regime. Regardless of its circumstances, the void left by his death would be felt in Viennese diplomatic circles and at OPEC HQ where he began his career in earnest.

Going back to 2008, the Oilholic remembers his first interaction with Ghanem from press scrums at a meeting of ministers where journalists jostled to receive his answers in fluent English. His audience in Vienna had grown, more so as his boss Gaddafi had denounced terrorism and come back from the cold to rejoin the international community. Whether Ghanem himself was a saint or a sinner will now never be known.

Away from crude politics, troubled refiner Petroplus’ administrators have found a buyer for its Swiss asset – the Cressier Refinery – in the shape of Varo Holding, a joint venture between trading firm Vitol and AltasInvest. Under the sale agreement, cash strapped Petroplus would transfer Cressier and allied Swiss marketing and logistics assets - Petroplus Tankstorage, Oléoduc du Jura Neuchâtelois and Société Française du Pipeline du Jura to Varo.

Sources suggest Varo hopes to close the deal before the end of June with plans of restarting the 68,000 barrels per day refining facility thereafter. Finally, fresh economic headwinds are bringing about a price correction in the crude markets as recent elections in Greece and France have triggered a Greek Tragedy (Part II) and a Geek Tragedy (a.k.a. Francois Hollande) respectively.

A hung parliament and political stalemate with fears of the terms of the last Greek bailout not being met is impacting market sentiment on the one hand. On the other, newly elected Socialist President of France – Francois Hollande – sees his less than convincing mandate as one of the French public voting against ‘austerity’ and perhaps uncosted grandiose spending plans. On Tuesday, oil trading sessions either side of the pond remained volatile in light of the situation.

Summing up the nerviness in the markets following events of the past few days, Sucden Financial analyst Myrto Sokou notes, “Spain has confirmed that it will provide with additional money for the bank rescue of Bankia, the country's third largest bank in terms of assets. In Greece, the political situation is still uncertain as the country remains without a government after Sunday’s elections…The parties which signed the EU bailout memorandum are now in a minority as Greek voters rejected further austerity plans.”

Concurrently, analysts at Société Générale believe that generally bearish sentiments and still weak fundamentals should continue to combine and prevail and that the entire energy complex seems to be headed for a continued correction downwards. “Oil has performed better than other European energy commodities in 2012, but this seems to have changed during the first week of May. Oil price behaviour will be the key to avoid further slides in European energy prices,” they note.

As if that was not crude enough, an investment note by Citibank just hitting the wires suggests there is now a 75% possibility that Greece would be forced to leave the Eurozone within 12 to 18 months. With no swift Eurozone solution in sight, be prepared to expect further volatility and perceptively bearing trends in the crude markets. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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

On Oilfield services co’s & a Texan Goodbye

Last two days have been about chatter on oilfield services and drilling companies at a pan global level based on Houstonian feedback, an interesting editorial and an investment note – all of which suggest that things are stable, growth will occur but that 2012-2013 may not be as good as 2011.

The reason is tied-in to the Oilholic’s last few blog posts that natural gas price is low and crude oil price is relatively high. So gains are to be made on one side of the business and the other side – while not necessarily countering all gains – would still stunt growth to a degree according to those in the know. Furthermore, growing competition within the services and drilling industry also means the biggest companies will still grow over the next 12 months, but not by the 10%-or-higher range that would warrant a continued positive outlook according to Moody’s.

“We foresee lower operating margins and slower EBITDA growth in 2012-2013 for the three companies that offer the best barometer of industry conditions – Schlumberger, Halliburton and Baker Hughes,” says Stuart Miller, Vice President & Senior Analyst at the ratings agency.

“We would move our outlook to positive if we projected that sector’s EBITDA would grow by more than 10% (annualised) over the next 12-18 months, while a drop of more than 10% would translate to a negative outlook,” he concludes.

The US rig count is also expected stabilise in 2012-2013. Oil-directed drilling will continue to outperform, but natural gas drilling will remain depressed into the foreseeable future, leading to a slower upward curve according to the agency.

(Click on graph - above right - to enlarge; for the latest Baker Hughes Rig Count click here). Nonetheless, drilling and associated services in unconventional plays continues as an area of strength for the industry.

The technical difficulty of developing unconventional resources will support a robust demand for sophisticated (also read expensive) horizontal well services. Companies such as Superior Energy Services, Key Energy Services and Basic Energy Services all stand to gain from their increasing exposure to unconventional plays, says Moody’s.

This ties-in nicely to an editorial in the latest (Apr 13, 2012) issue of the Houston Business Journal by Deon Daugherty in which she notes that private equity funding is being pumped in to oilfield services firms as 2012 unfolds alongside the usual investment in other traditional E&P components of the business.

Based on feedback from key local players, Daugherty writes that the technology and technical expertise needed to drill complex horizontal wells, hydraulic fracturing and expensive equipment is partly behind Houston private equity funds pouring investments in to oilfield services companies, alongside a high price of black gold driving investment into traditional E&P activity.

Speaking of editorials, there is another interesting and controversial one in The New Yorker (Apr 9, 2012) which makes a comment on ExxonMobil – the world’s largest “non-state-owned” corporation with annual revenues exceeding the GDP of Norway – and its ties with the US Republican Party.

While Democrats love to loathe the Irving, Texas headquartered IOC, columnist Steve Coll, splendidly notes that ExxonMobil CEO Rex Tillerson and President Obama "appear to share at least one understanding about energy policy and the 2012 (presidential) campaign: they are both aware that the partisan and media-amplified war over where to place the blame for rising (US) gasoline prices is largely a phony one."

The Oilholic couldn’t have put it better himself that being an E&P behemoth and that in itself being the area where its core interests are, "ExxonMobil can neither control prices at the pump nor make high profits there."

On a related R&M note, a Bloomberg report suggests that Delta Airlines is possibly in talks with ConocoPhillips about purchasing the Houston-based oil and gas major’s Trainer Refinery in Pennsylvania. Citing anonymous sources, the newswire says Delta would use the fuel from the Trainer refinery and other refineries in exchange for other products made there that it would not use.

While ConocoPhillips has said it would close the Trainer facility if it could not find a buyer by the end of May, its spokesman Rich Johnson told Bloomberg it is "still in the process of seeking a buyer for the refinery” and that the process was confidential. If it goes through, the move would be a remarkable one for a privately listed international airline.

Lastly on a crude pricing note, local media outlets suggest Enterprise Product Partners and Enbridge plan to reverse the flow of the Seaway oil pipeline two weeks ahead of schedule by mid-May pending US regulatory approval, thereby starting a much-needed reduction of excess crude from the US Midwest down and dispatch it to the Gulf Coast.

While the crude fetches a premium in the Gulf Coast, high inventory levels at the Cushing, Oklahoma – the delivery point for WTI oil futures contracts – have impacted WTI pricing relative to Brent. Reports suggest a mid-May (May 17) start date for the pipeline flow reversal will initially carry about 150,000 barrels per day of crude from the Midwest to the Gulf Coast. The news had an immediate impact as the arbitrage between transatlantic Brent and Gulf coast crudes on one hand and WTI on the other contracted sharply.

At 18:15 GMT, Light Louisiana Sweet (LLS) traded at US$19.40 a barrel premium over WTI, down US$1.65 from Friday's, Mars Sour (MRS) traded at US$12.25 a barrel over WTI down US$1.75, Poseidon (PSD) traded at US$11.55 over WTI down US$1.55.

Meanwhile, the ICE Brent futures contract for June traded at US$118.60 down US$2.61. Hitherto Brent crude and Gulf Coast crudes were moving up in tandem for the last 18 months, so this is certainly welcome news for those hoping for a return to more traditional levels stateside between WTI and Gulf Coast crudes.

Sadly, it is now time to bid another goodbye to Houston – a city which the Oilholic loves to visit more than any other. Yours truly leaves you with a view of the Minute Maid Park in downtown Houston. It is home to the local baseball team – the Houston Astros.

The stadium has a capacity of 40,963 spectators according to a spokesperson with an electronically retractable roof which was developed by Vahle, courtesy of which it can be fully air-conditioned when required – a wise decision given the city’s often hot and humid weather!

A local enthusiast tells the Oilholic that the field is unofficially and lightheartedly known as "The Field Formerly Known As Enron" by fans, locals, critics and scribes alike, acquiring the title in wake of the Enron scandal, as the failed energy company had bought naming rights to the stadium in 2000 before its spectacular and fraud-ridden collapse in November 2001.

Thankfully, on June 5, 2002, Houston-based Minute Maid, the fruit-juice subsidiary of Coca Cola Company, acquired the naming rights to the stadium for 28 years. Unlike Enron, it’s a healthier brand says the Oilholic. That’s all from Texas folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore/National Geographic. Photo 2: Minute Maid Park - home of the Houston Astros, Texas, USA © Gaurav Sharma 2012. Graph: Land & Offshore rig count and forecast © Baker Hughes/Moody's.