Showing posts with label oil price slump. Show all posts
Showing posts with label oil price slump. Show all posts

Saturday, April 04, 2020

A catalogue of ‘crude’ missives on oil market turmoil

In the nine days that have lapsed since yours truly last wrote a blog post, the crude oil market has gone crude and cruder, peppered with barmy ideas, suggestions of strange alliances, tariffs, and of course tweets. For all of that, two things haven't materially changed – crude demand collapse continues as the coronavirus or Covid-19 pandemic spreads, and oversupply in the face of demand destruction is already here.

So here are few of The Oilholic’s missives via Forbes and Rigzone tackling various market slants between March 26-Apr 2:

  • With whole countries in lockdown mode, forecasters now reckon a fifth of global crude demand could be wiped out - Forbes, Mar 26, 2020
  • The Oilholic's thoughts on why a resurrection of OPEC+ would be too little, too late for the oil market - Forbes, Mar 27, 2020.
  • Oil futures are in record contango - Forbes, Mar 29,2020
  • Oil benchmarks ended Q1 2020 around 66% lower and lack of storage space is becoming apparent - Forbes, Mar 31, 2020
  • US shale explorer Whiting Petroleum becomes the first casualty of the current oil price slump as it files for bankruptcy - Forbes Apr 1, 2020
  • Moody's announces series of predictable negative outlooks on major oil and gas companies - Forbes, Apr 1, 2020
  • How Saudi belligerence has pushed VLCC rates to comedic highs - Rigzone, Apr 1, 2020
  • And finally, how a Donald Trump tweet sent oil futures soaring but the gains are unlikely to last - Forbes, Apr 2, 2020

And that's about it for the moment folks! Stay safe, keep reading, keep it 'crude'!

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To follow The Oilholic on Rigzone click here.

© Gaurav Sharma 2020. 

Tuesday, March 10, 2020

View on a 'crude' few days from Houston

The Oilholic is glad to be back in Houston, Texas, US for yet another visit. However, in many ways the latest outing marks several first instances. It is this blogger's first instance of arriving in America's oil and gas capital right after an OPEC summit, the first immediately following a mammoth oil price crash, and the first when several events yours truly was planning on attending, including IHS CERAWeek have been cancelled due to the coronavirus outbreak that is wrecking the global economy. 

Yours truly promised some considered viewpoints 'to follow' while scrambling out of Vienna, to get here via London following the collapse of OPEC+, and here they are - thoughts on why $30 oil prices could be the short-term norm, and in fact $20 could follow via Forbes, thoughts on the shocking but inevitable collapse of OPEC+ via Rigzone, and why the recovery since Monday's (March 9) oil price slump is not a profound change to where the market stands, again via Forbes

Interspersed will penning thoughts for publications, the Oilholic met some familiar trading contacts in H-Town (you all know who you are), and met two new crude souls via mutual contacts too. Most seem surprised by the level of Aramco's discounts for April cargoes, and opined that they were three times over their expectations. 

The Saudis certainly mean business, and what was a crisis of demand following the coronavirus outbreak that has crippled China; has Iran, Italy and South Korea in its grip; and has seen emergency protocols being activated from California, US to Hokkaido, Japan now has a new dimension. It is now a crisis of demand coupled with a supply glut as OPEC and non-OPEC producers tough it out in a race to the bottom of the barrel. That's all from Houston, for the moment folks! More soon. For now, keep reading! Keep it 'crude'!

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© Gaurav Sharma 2020. Photo: Downtown Houston, Texas, US © Gaurav Sharma, March 10, 2020.

Friday, March 06, 2020

OPEC+ talks collapse; oil futures tank

The Oilholic had to leave OPEC HQ prior to the conclusion of a rather fractious OPEC+ meeting which resulted in no agreement being reached among OPEC and its non-OPEC partners. Following are the key takeaways, from Vienna Airport:

  • Russia blocked OPEC efforts aimed at deepening ongoing OPEC+ cuts by 1.5 million barrels per day (bpd) raising the output cut level to 3.2 million bpd to the end of 2020.
  • Stalemate means current level of cuts are set to expire as of April 1, 2020.
  • Russian Oil Minister Alexander Novak even refused name/set date for next OPEC+ meeting; technical committee to meet on March 18.
  • Senior OPEC sources tell this blogger “There is no plan B”.
  • Oil benchmarks slump by as much as 8% in the immediate aftermath of the development and trading down by ~10% at the time of writing; Brent/WTI front-month contract at levels last seen in August 2016, and recorded largest intraday drop since the financial crisis. 

More considered viewpoints/analysis to follow once yours truly has arrived in Houston. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2020.

Friday, February 28, 2020

A right royal crude market hammering


Coronavirus jitters have delivered a right royal hammering to the crude oil market, with the pace of bearish blows picking up considerably over the last 48 hours. Both major benchmarks are now over 25% below their 2020 peak achieved in the wake of the US-Iran skirmish at the turn of the new trading year. 

Key issue in finding a price floor stems from the fact that many, in fact most, crude demand forecasters are shooting blind, as the Oilholic wrote on Forbes.com. The local viral outbreak in China soon became a regional epidemic, and is now – in the view of some – a global pandemic in a matter of weeks. Complete dataset of the virus' economic impact will be trickling in soon, and there is market conjecture around that the global economy could be heading for a recession. 

Were that to be the case, and the fact that the virus has reached 50 countries, could result in crude demand destruction on an unprecedented scale, as yours truly via on Rigzone. So where from here? No one really knows, and unless OPEC+ provides temporary reprieve via a production at its next meeting scheduled for March 5-6, price floor would be hard to pin down. We could see benchmarks tumbling to as low as $30 per barrel; something that has indeed happened in the not too distant past. 

For now retail, travel, airline and energy stocks continue to take a hammering. In fact, the energy sector is now down 34% from 52-week closing high, while both Brent and WTI futures look likely to post their worst weeks in recent memory (last seen between December 2008 and January 2009 at the height of the global financial crisis). 

That was also the verdict of many yours truly interacted at the recently concluded International Petroleum Week in London. The event itself looked like it fell victim to the coronavirus as understandably Chinese and indeed many overseas delegates stayed away. 

Only major energy CEOs in attendance were those of BP and Vitol, and most attendees were pretty pessimistic about the oil price direction. Nonetheless, dialogues on energy transition over the course of three days proved to be very interesting as the sector continues its attempt at a low-carbon future. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2020. Graphs 1 & 2: Brent & WTI futures price movement 3M to Feb 27, 2020.

Saturday, November 24, 2018

Three -7% crude slumps & a WEC engagement

As the Oilholic headed for a splash and dash visit to the familiar surroundings of Vienna on another early morning British Airways flight to the Austrian capital on Friday (November 23), one couldn't but help notice that yet another oil futures selloff was underway in Asia, with regional closing trends indicative of 2% declines. 

By the time this blogger landed at Vienna International Airport at half past noon, the decline had become more pronounced in European trading hours. And a few hours later in the US, the intraday rout was complete with both WTI and Brent front-month contracts registering declines of  tad over 7%. 

What is worth noting here is that the latest drop is the third such decline - not just in the quarter, or on the month, but in the short space of a mere 10 trading sessions. Overall, crude prices have slumped by 30% over the last 7 weeks; quite something given the amount of bullish nonsense that was on the airwaves prior to the slide. 

If this isn't a slump, what is? Especially, as Brent also slid below $60 per barrel. Not so long ago, the global proxy benchmark was approaching $85, leading to typical exaggerated market forecasts in some quarters that the benchmark would hit $100 over Q1 2019.

Those who never believed such predictions, including this blogger, and expressed a net-short position ought to feel vindicated. The froth has gone out of the market, and sentiment remains largely bearish. However, there is such a thing as an 'over-correction'. The Oilholic thinks the slide has been too steep, too fast because the macroeconomic dynamic on the supply side has not undergone a similar sentimental slump. 

The Trump-China face-off, global growth rate (which is steady but not quite firing up), possibility of European upheavals (Brexit, Italy, Greece, Spain, etc), and an unimpressive oil demand growth range of 1.1 to 1.4 million barrels per day (bpd), were all priced in when the WTI was lurking in the $60s and Brent in $70s.

That for the Oilholic was the optimal range/level for both contracts, before the so-called false prophets exaggerated the impact of Iranian sanctions slapped unilaterally by the US on Tehran. Hedge Funds and money managers then piled in, as they tend to with jumped up net-long calls, in the hope of extending the rally and Brent hit thoroughly unmerited $80+ intraday levels.

Therefore, when the initial correction hit, dragging Brent first down to $70, and subsequently below, it was merited. However, the Oilholic believes we are in an over-correction patch now. The market is in a real danger of swapping one extreme for another, and as usual the false prophets are it again, with some predicting a slump to $40 and below. The volatility of the last few weeks has delivered a classic lesson on why not to trust them.


Moving on from 'crude' rants, the Oilholic was delighted to speak at the World Energy Council's (WEC) Vienna Energy Summit, which is what the early morning departure from Heathrow and earlier than usual scrutiny of oil prices in East Asia - should you follow one on Twitter - was all about.


The summit addressed a number of crucial subjects, and gave due weight to the macroeconomic and sociopolitical climate beyond current and future permutations in the energy markets.

Fellow panellists and yours truly deliberated, Saudi Arabia's transformation (at least on paper) to renewable energy, impact of regulations on the oil price and world order, petro-yuan hypothesis, those inimitable Donald Trump tweets and diplomacy by social media, Iran sanctions and much more.

It was a great industry dialogue, and a pleasure finally connecting with Dr Robert Kobau, Secretary General of WEC Austria (above right). With so much ground to cover, the session just flew by and animated, good spirited discussions spilled over to the after event reception, as how industry dialogues should be. All the remains, is to say it's time for the big flying bus home! Keeping reading, keep it ‘crude’!

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© Gaurav Sharma 2018. Photo: Gaurav Sharma with Dr Robert Kobau, © Gaurav Sharma 2018.

Monday, November 19, 2018

Crude froth goes before a fall?

What a commotion we had in the oil markets last week, when Tuesday's (November 13) session saw an intraday decline of 8% for the West Texas Intermediate, and a near similar drop for the Brent front-month contract. 

Long calls unravelled in higher numbers as the market increasingly came to the realisation that there was still plenty of crude oil in the market regardless of the Trump versus Iran situation. Of course, as it tends to happen, when the market oversells or overcorrects, a recovery run follows. As it were, come Friday, Brent was down by 4.87% and WTI was down 6.19% on the previous week’s closing position. 

If nothing else, what the selloff did was ensure a puncturing of bullish illusions and flag up the fact (again!) that three crude oil producers alone – US, Saudi Arabia and Russia – were pumping more than all of OPEC, albeit with very different geopolitical agendas of their own. The sudden decline also makes for an interesting OPEC meeting scheduled for December 6. 

Nonetheless, the proof is in the 'crude' pudding – i.e. the latest CFTC and ICE data which points to a decline in global net-long positions. Starting with Brent contracts – for the week ending November 13, money managers' net long positions fell 17% to 214,832 contracts; the lowest level on record in nearly 18 months. 

Concurrently, WTI net-long positions fell 5.2% to 151,984 futures; the lowest since August 2017. Anyone for $100? That's all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2018. Photo © Cairn Energy 

Sunday, July 09, 2017

Time for Istanbul and WPC 22

The Oilholic has arrived in Istanbul, Turkey for 22nd World Petroleum Congress, with the 2017 edition being this blogger’s third. 

Oh how time flies! Many in the industry must be wondering the same – from Doha (2011) to Moscow (2014) to Istanbul in 2017, the price of crude, using Brent as a benchmark, has fallen considerably, even if it was not a steady downward trajectory.

In 2011, the industry was looking at three-figure prices following a recovery from the global financial crisis. In 2014, the signs of an oil price slump were visible and in here in Istanbul we see it crudely languishing in the $40s despite an OPEC production cut - of 1.8 million barrels per day - in concert with 10 non-OPEC players, at least on paper, and in place until March 2018.

With customary aplomb over 6,000 delegates are expected at the industry’s premier jamboree with 500 chief executive officers, 50 ministers and around 25,000 visitors for the World Petroleum Exhibition; one of the largest strategic oil and gas expos in the world.

Over coming days we can expect to hear from the bosses of Shell, BP, Total, ExxonMobil, Chevron and many more, and ministerial soundbites from India to Iran, Kuwait to Russia and then some. Watch this space, but that’s all from Istanbul for the moment folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2017. Photo: Istanbul Congress Center, venue of the 22nd World Petroleum Congress © Gaurav Sharma 2017.

Friday, May 12, 2017

OPEC quips send oil futures $1.50 or 3% higher

Its official OPEC ministers' and Russia's quips in favour of extending oil production cuts beyond June appear to have worked. Oil benchmark prices perked up by a princely $1.50 or just over 3% in week-over-week terms

Brent, the global proxy benchmark is well clear of $50 per barrel. If anything else, it's good news for the US oil patch, with independents plugging away, as another weekly uptick in the Baker Hughes rig count suggests

Away from it all, US President Donald Trump is perplexing the oil and gas industry in Texas. For a man who claims to be a champion of the 'crude' world, Trump's jibes against NAFTA are causing dismay in the oil and gas capital of the world, where people understand more than most, the cross border nature of the industry. 

Here's the Oilholic's reading of the situation in a detailed analysis and commentary piece for IBTimes UK. In a nutshell, if NAFTA is ripped up and Trump provides little or no clarity on US taxation - the oil and gas business would be hurt disproportionately. 

Most think its unlikely Trump will stir too much on the the NAFTA front. However, Trump being Trump you never know. That's all from Houston folks! Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com


© Gaurav Sharma 2017. 

Wednesday, November 30, 2016

OPEC agrees output cut of 1.2m bpd to 32.5m bpd

OPEC has agreed to cut production by 1.2 million barrels per day (bpd) to 32.5 million bpd at the conclusion of its 171st meeting of ministers. If carried out from January, this would be its first cut in eight years.

The oil futures market, which registered a slump of 4% overnight, rallied in response registering a rise of over 8%. 

However, the crude reality is that much of the above cut - i.e. 486,000 bpd - will come from the Saudis. As the Oilholic's report for IBTimes UK outlines, others will pitch in too. OPEC also said it would be counting on 600,000 bpd of non-OPEC cuts, bulk of which would come from Russia. That's where the real riddle is. What sort of compliance will we see from Russia? 

Furthermore, what about internal compliance within OPEC?  Mohammed Bin Saleh Al Sada, Qatar's Minister of Energy and Opec President, said a ministerial monitoring committee chaired by Kuwait, along with Venezuela and Algeria would be established to monitor the cuts.

Al Sada also described the decision as "historic" adding that: "We have no regrets about not having cut production in the summer of 2014. Opec has reacted to current oil market realities in taking this decision and delivered on what we agreed in September [at the International Energy Forum in Algiers]. 

More from Vienna shortly folks, once yours truly has digested this crude bit of news! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Mohammed Bin Saleh Al Sada (left), Qatar's Minister of Energy and Opec President unveils an oil production cut of 1.2m barrels per day at the conclusion of its 171st meeting of ministers' in Vienna, Austria on 30 November, 2016. © Gaurav Sharma, November 30, 2016.

Saturday, August 20, 2016

Pump more, even if oil price slumps more mantra

As oil remained in a technical bear market for much of July, we saw well timed quips by major oil producing nations, within OPEC and beyond, fanning chatter of another round of talks aimed at freezing production. And well, its done the trick – both Brent and WTI futures have bounced back from the their low point of August 2, to an above 20% rise as the Oilholic writes this post, i.e. a technical bull run!

Yours truly cannot consciously recommend buying into this phoney rally, because any talks between OPEC and non-OPEC producers face the same impediments as last time, with Iran and Iraq remaining non-committal, and those calling for a freeze (Saudi Arabia and Russia) only willing to do so at record high levels of production. For the Oilholic’s detailed thoughts on the issue, via a Forbes post, click here

However, it’s not just National Oil Companies who are in full on production mode. It seems the largest independent US and Canadian oil exploration and production (E&P) companies are still paying their executives more to focus on boosting production and replacing reserves, rather than conserving capital and reducing debt, according to Moody's.

Only four companies of the 15 companies, the ratings agency sampled in July, even included debt-reduction goals as part of their broader financials, or balance-sheet performance goals. For example, Pioneer Natural Resources (rated by Moody’s Baa3 stable) included a ratio of net debt-to-EBITDAX to account for 15% of its executives' target bonus allocation.

Fourteen of the sampled companies use performance award plans linked to relative total shareholder return. Christian Plath, Senior Credit Officer at Moody's, opined that the strong and direct focus on share prices raises certain credit risks by rewarding aggressive share repurchases and the maintenance of dividends even when cutbacks would be prudent.

“The focus on shareholder returns also reflects the E&P companies' high-growth mindset, and may motivate boards and managers to focus on growth over preserving value. Nearly all of the awards are in some way linked to share-price appreciation. While large companies generally try to tie long-term pay closely to share-price performance, the link appears stronger in the E&P sector,” he said. 

Furthermore, Moody’s found that despite the slump in oil prices that has dented E&P company returns, production and reserves growth targets still comprised almost a quarter of named senior executives' target bonuses in 2015.

“This makes it the most prevalent metric in annual incentive plans ahead of expense management and strategy. Given our pessimistic industry outlook, this system of compensation is negative for credit investors and suggests that many E&P companies are finding it difficult to shed their high-growth strategies," Plath added.

Drawing a direct connection between what Moody’s says from a sample of 15 North American E&P companies and the gradually rising US and Canadian rig counts would be an oversimplification of the situation.

However, taken together, both do point to producers stateside either getting comfortable in the $40-50 per barrel price range or finding ways of carrying on regardless with the full backing of their paymasters. Any price boosting production freeze by global oil producers will be warmly welcomed by them. That’s all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: Pipeline warning sign, Fairfax, Virginia, USA © O. Louis Mazzatenta / National Geographic.

Saturday, July 30, 2016

Those rapidly sliding oil demand projections!

It’s been another mad month for the Oilholic and might one add for the oil markets as well. At the conclusion of the OPEC summit in Vienna back in June, there was a sense that a slow, but sure road to rebalancing somewhere between March and June 2017 would be the order of the day.

Then Brexit happened, Italian banks crisis escalated, Chinese refiners driven on by cheaper crude imports ensured a gasoline glut hit the Asia Pacific market, while US refiners went on a binge largely off cheap Iraqi imports.

Donald Trump and his protectionist stance remains fighting fit as a painfully long US presidential election campaign finally enters its final phase. China’s economy remains lethargic, as do global central banks when it comes to monetary stimulus – Bank of Japan, US Federal Reserve, Bank of England – take your pick.

Put it all together and factor in the return of barrels, taken out earlier this year, from Canada to Nigeria, Venezuela to Colombia, and you come up with nothing other than a bearish market as July draws to a close. In fact, oil benchmarks are down 20% since the OPEC summit, and with good reason – neither is demand going anywhere, nor is oversupply dissipating.

However, it’s demand woes that are knocking market sentiment more at the moment. OPEC and IEA continue to maintain global oil demand growth projections for 2016 in the region of 1.2-1.4 million barrels per day (bpd). Given the current set of market circumstances, yours truly is not at peace with the said range. City analysts aren't either.

Barclays' commodities research team reckons demand is likely to be in the region of 1.1 million bpd, several others put it around 1 million bpd, but last week Morgan Stanley said even its conservative forecast of 800,000 bpd might not be met.

In a note to clients on July 24, the investment bank’s analysts subsequently wrote: "We are cutting our forecast for global refinery demand for crude oil (runs) to 625,000 bpd from 800,000 bpd on expected run cuts, with downside risk to these low numbers.

"We also recently lowered our third quarter average Brent price forecast from $50 per barrel to $45, and see more downside risk."

In fact, downside risk is likely to become the order of the day, week and month. As the Oilholic said on TipTV, there is little out there to fire-up demand. Finally, while the mad month ensured the Oilholic didn’t blog here as frequently as he’d like, here are some of one’s market quips in IBTimes UK and Forbes over the last few weeks. 


Here is one’s take on demand fears, and last but not the least – Russia upping its oil production ante. That’s all for the moment folks! Keep reading, keep it crude! 

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2016. Photo: Abandoned petrol station in Preston, Connecticut, USA © Todd Gipstein / National Geographic.

Thursday, June 02, 2016

OPEC issues no word on quota (again!)

The 169th OPEC ministers meeting has concluded in Vienna, Austria with the producers' collective yet again failing to reveal its 'official production quota'. 

But analysts took heart from the fact that OPEC finally appointed a new Secretary General - Nigeria's Mohammed Sanusi Barkindo - to succeed Abdalla Salem El-Badri.

There might well be discord with respect to Iran's bid to ramp production up to 4 million barrels per day, but the appointment of a compromise candidate as Secretary General is definitely a step in the right direction for us lot in the analyst community.

OPEC also observed that since its last meeting in December 2015, crude oil prices have risen by more than 80%, supply and demand is converging and oil and product stock levels in the OECD have recently shown relative moderation.

Additionally, Gabon will be readmitted to the OPEC fold with effect from 1 July, taking OPEC's membershp up to 14, having already readmitted net oil importer Indonesia last year.

Finally, the next OPEC meeting is on 30th November. That’s all for the moment from Vienna folks! Keep reading, keep it crude!

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To email: gaurav.sharma@oilholicssynonymous.com


© Gaurav Sharma 2016. Photo: Press conference at the conclusion of OPEC's 169th Ministerial Meeting in Vienna, Austria © Gaurav Sharma, June 2, 2016.

Friday, May 20, 2016

It’s about the ‘crude’ bid/ask differential stupid!

That there are distressed oil and gas assets stateside is pretty obvious. The damage was done, or rather the distress was caused, long before the crude oil price started lurking in its current $40-50 per barrel range, with no guarantees and only calculated guesses on where it is going next.

Actually, nowhere but the current range, as some, including the Oilholic, say. We’d agree that the high yield debt market is in the doldrums, and pretty much since the oil price slump began in 2014 we are told private equity players are sizing up the level of distress and waiting for a timely swoop for assets armed with billions of dollars. 

There is only one problem – the bid/ask differential. Some, not all, sellers of distressed assets are still in denial and holding out for a better price. Buyers themselves, to be read as private equity buyers, are no mugs either and won’t buy any old asset at any old price. It then bottles down to the buying the right asset at the right price in a high stakes game, to quote not one but several of this blogger’s friends who addressed the Baker & McKenzie Oil & Gas Institute.

Then again other industry contacts, whom yours truly interacted with at the Mergermarket Energy Forum, say there is evidence of the bid/ask differential narrowing considerably relative to last May because some sellers literally have no choice and are desperate.

But now the PE guys want ‘quality’ distressed assets and some, as has become apparent in the Oilholic’s discussions with no less than 20 industry contacts and having participated in three oil and gas events (and counting) since Monday.

Anecdotes go something like this – some PE firms no longer want to buy an asset from a distressed oil and gas firm in Chapter 11 bankruptcy proceedings, but rather wait for it to actually go bust and then go for the target asset on much better terms, despite the obvious risk of losing out on the deal should another suitor emerge during the game of brinkmanship.

The debate will rumble on for much of 2016 with close to 70 US oil and gas firms having filed for bankruptcy this year alone! You get a sense in Houston that PE firms have the upper hand, but aren’t having it quite their own way, just as plenty of zombie small to mid-sized oil and gas companies that do not deserve to survive continue to muddle along. That’s all for the moment from Houston folks; keep reading, keep it crude!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2016. Photo: Oil pump jacks in Texas, USA © National Geographic Society.

Tuesday, May 17, 2016

Gauging crude sentiments in Houston Town

The Oilholic is back in Houston, Texas for a plethora of events and another round of crude meetings. The weather in the oil and gas capital of the world at the moment seems to be mirroring what’s afoot in the wider industry, for there's rain, clouds, thunderstorms and the occasional ray of sunshine.

The industry’s mood hasn’t progressively darkened though; in fact it’s a bit better compared to when yours truly was last here exactly 12 months ago. Dire forecasts of $20 per barrel have not materialised, and forecasts of shale players in mature viable plays surviving at $35+ per barrel are appearing to be true. Additionally, the oil price is sticking in the $40-50 range.

That’s not to say another round of hedging will save everyone; bankruptcies within the sector continue to rise stateside. On the plus side US oil exports are now permitted and the speed with which President Barack Obama did away with a decades old embargo came as a pleasant surprise to much of the industry both within and beyond Houston. 

Finally, the US Energy Information Administration's recently released International Energy Outlook 2016 (IEO2016) projects that world energy consumption will grow by 48% between 2012 and 2040.

Most of this growth will come from countries that are not in the Organization for Economic Cooperation and Development (OECD), including countries where demand is driven by strong economic growth, particularly in Asia, says the Department of Energy’s statistics arm. Non-OECD Asia, including China and India, account for more than half of the world's total increase in energy consumption over the projection period. 

Plenty of exporting potential for US oil then! That’s all for the moment from Houston folks; keep reading, keep it crude!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2016. Photo: Downtown Houston, Texas, US © Gaurav Sharma.

Thursday, March 31, 2016

Preparing for an oil slump away from US pumps

The Oilholic is delighted to be back in lovely San Francisco, California, some 5350 miles west of London town. And what a 'crude' contrast it has been between two visits - when yours truly was last here little less than two years ago, the oil price was in three figures and our American cousins were (again!) bemoaning oil prices at the pump, not all that unaware about even higher prices we pay in Europe.

Not so anymore – for we’re back to under $3 per gallon (that’s 3.785 litres to Europeans). Back in January, CNBC even reported some pumps selling at rock bottom prices of as little as 46 cents per gallon in eastern US; though its doubtful you’ll find that price anywhere in California. 

Nonetheless, the Bay Area’s drivers are smiling a lot more and driving a lot more, though not necessarily honking a lot less in downtown San Francisco. By and large, you might say its happy days all around; that’s unless you run into an oil and gas industry contact. Most traders here are pretty prepared for first annual decline in global oil production since 2009, underpinned by lower US oil production this year.

Ratings agency Moody’s predicts a peak-to-trough decline in US production of at least 1.3 million barrels per day (bpd) that is about to unfold. On a related note, Genscape expects North American inventories to remain at historically high levels for 2016, and production to fall by -581,000 bpd in 2016, and -317,000 bpd in 2017, as surging blended Canadian production is expected to grow at +84,000 bpd year-over-year in 2016.

Most reckon the biggest US shale declines will occur in the Bakken followed by the Eagle Ford, with Permian showing some resilience. Genscape adds that heavy upgrader turnarounds in Spring 2016 will impact near-term US imports from Canada.

All things being even, and despite doubts about China’s take-up of black gold, most Bay Area contacts agree with the Oilholic that we are likely to end 2016 somewhere in the region of $50 per barrel or just under.

As for wider domino effects, job losses within the industry are matter of public record, as are final investment decision delays, capital and operating expenditure cuts that the Oilholic has been written about on more than one occasion in recent times. Here in the Bay Area, it seems technology firms conjuring up back office to E&P software solutions for the oil and gas business are also feeling the pinch.

Chris Wimmer, Vice President and Senior Credit Officer at Moody's, also reckons the effects of persistently low crude oil prices and slowing demand in the commodities sectors are rippling through industrial end markets, weakening growth expectations for the North American manufacturing sector.

Industry conditions are unfavourable for almost half of the 15 manufacturing segments that Moody's rates, with companies exposed to the energy and natural resource sectors at the greatest risk for weakening credit metrics.

As a result, Moody's has lowered its expectations for median industry earnings growth to a decline of 2%-4% in 2016, from its previous forecast for flat to 1% growth this year. "This prolonged period of low oil prices initially affected companies in the oil & gas and mining sectors, but is spreading to peripheral end markets," Wimmer said.

"Slackening demand and cancelled or deferred orders in the commodities sectors will constrain growth for a growing number of end markets as the fallout from commodities weakness and lackluster economic growth expands."

Everyone from Caterpillar to Dover Corp has already warned of lower profits owing to weak equipment sales to customers in the agriculture, mining, and oil and gas end markets. The likelihood of deteriorating performance will continue to increase until the supply and demand of crude oil balance and macroeconomic weakness subsides, Wimmer concluded.

Finally, as the Oilholic prepares to head home, not a single US analyst one has interacted with seems surprised by a Bloomberg report out today confirming the inevitable – that China will surpass the US as the top crude oil importer this year. As domestic shale production sees the US import less, China’s oil imports are seen rising from an average of 6.7 million bpd in 2015 to 7.5 million bpd this year.

And just before one takes your leave, Brent might well be sliding below $40 again but all the talk here of a $20 per barrel oil price seems to have subsided. Well it’s the end of circling the planet over an amazing 20 days! Next stop London Heathrow and back to the grind. That's all from San Francisco folks. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo I: Vintage Tram in Downtown San Francisco. Photo II: Gas prices in Fremont. Photo III: Golden Gate Bridge, San Francisco, California, USA © Gaurav Sharma, March 2016.

Monday, February 29, 2016

Fitch joins Moody’s in cutting oil price estimates

Barely a month after Moody’s drastically revised its oil price assumptions, rival Fitch Ratings followed suit last week. Writing to clients, Fitch said its new base case is for Brent and WTI oil prices to average $35 per barrel in 2016. 

It had previously expected oil to average $45 per barrel. However, Fitch’s long-term base case price assumptions remain unchanged at $65 per barrel. The ratings agency said its drastic revision was down to a combination of stock build-up over the mild winter, higher-than-expected OPEC production in January and increasing evidence that global economic growth for the year will be weaker than previously forecast.

“This suggests there will still be a supply surplus in the second half of 2016, albeit reduced from current levels, and that markets will probably only reach a balance in 2017. Even then, very high inventories will limit price increases,” Fitch added.

In light of recent volatility, Fitch’s reworking of price assumptions is hardly a surprise, and on Jan 21st rival Moody’s had done likewise. The latter lowered its 2016 price estimate for both Brent WTI to $33 per barrel.

In Moody’s case, for Brent, it marked a $10 per barrel reduction from the rating agency's previous estimate, and for WTI, a $7 reduction. It currently expects both benchmark prices to rise by $5 per barrel on average in 2017 and 2018. The move also represented Moody’s second revision is as many months, having already slashed estimates back in December.

Terry Marshall, Senior Vice President at the ratings agency, said, "OPEC countries continue high levels of production in the battle for market share, contributing to the current oil glut despite moderate consumption growth by key consumers such as China, India and the US.

“In addition, we expect the rise in Iranian oil output this year to offset or exceed production cuts in the US."

So more cheer for the bears it seems, but little else. Volatility is likely to persist until June, but for the record, the Oilholic expects a very gradual climb in the oil price towards $50 per barrel from then onwards, as one wrote in a recent Forbes column. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Oil production facility © Cairn Energy