Showing posts with label risk premium. Show all posts
Showing posts with label risk premium. Show all posts

Monday, April 29, 2024

'Crude' carnage, a crazy April & arriving in H-Town

The crazy trading month of April is drawing to a close and the Oilholic is writing this missive on a sunny Houston afternoon, having arrived in H-town for industrial software firm AspenTech's thought leadership event - OPTIMIZE24. More on that later, and over the next couple of days. 

But first, let's sum up April's 'crude' carnage. The Brent front-month contract has broken its $85 per barrel support level. This wasn't looking likely at the start of the month when prices were lurking well above the level and even overshot to $92 in the wake of the Iran-Israel skirmish. Yet, as the second month of the second quarter of the oil trading year nears its conclusion, the price is barely holding above $83. Why? Well in this blogger's humble opinion that's certainly not because the risk has gone away. The residual risk still persists. 

However, with the Iran-Israel tensions having eased and oil sliding from $90+ highs, as trading stumbles into May with (thankfully) no regional damage to energy infrastructure - concerns over demand have resurfaced in a market struggling for direction. On one hand there are still lingering doubts about the performance of China's economy (yes there are) and the general direction of travel for the global economy, while on the other is an overriding sentiment that OPEC will hold firm on its price supportive actions. It what's your truly told Reuters the other day.  

Yes, Beijing is indeed importing record amounts of crude oil. But its importation uptick is nothing like it was pre-Covid. And quite a few of the barrels it is importing are being used to boost its strategic reserves. Furthermore, you can count an economy to have motored on in any given fiscal year if its data was consistently pointing to an upswing in economic sentiment, which it clearly isn't in China's case. Hence the doubts. 

As for OPEC, this blogger keeps hearing suggestions from some that the producers' group has lost control of the crude market. This is bonkers. In fact, the Oilholic doubts OPEC is anywhere even remotely near losing control. 

It appears to be actively positioning for a Brent price that is at least 15-20% higher than pre-Covid levels of around $75, seen at the start of January 2020. That'd be around a $80-$90 - a level that's not too high for buyers, not too low for it and well short of three-figures. It's why a market seeking direction is witnessing the current oscillation, while OPEC is left with plenty of spare capacity.

Away from crude chatter, and on to the happy matter of OPTIMIZE24, an event where the great and the good of the technical and engineering side of energy, industrial, chemical and manufacturing worlds are gathering this week at the behest of AspenTech. This blogger looks forward examining, discussing and learning about the challenges and solutions for the approaching low carbon horizon, and of course joining the dots between improved throughput and meeting emissions targets. 

The event's slogan "Partnering for the future" has a nice ring to it. Let's see how it sings over the next couple of days. More from H-Town soon. Keep reading, keep it here, keep it 'crude'! 

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Forbes click here.
To follow The Oilholic on Motley Fool click here.

© Gaurav Sharma 2024. Photo I: View of  George R. Brown Convention Center and Discovery Green, Downtown Houston, Texas, US, on Apr 29, 2024. Photo II: Gaurav Sharma at AspenTech's OPTIMIZE24 thought leadership conference, Houston, Texas, US., Apr 2024© Gaurav Sharma 2024.

Wednesday, January 31, 2024

The mad first month of crude trading year 2024

As the first month of the current oil trading year nears its end, the Oilholic's thoughts on the direction of crude prices hasn't materially altered. We're likely to see prices oscillate in the range of $70 and $85 per barrel in 2024, using Brent as a benchmark. And that's because the bearish bias in wider market fundamentals remains the same in a different trading year, despite all the geopolitical flare-ups we've seen October. We'll touch on those later in this blog. However, admittedly it has been the maddest possible start to trading. 

Feeling the pulse of the market and tepid demand, the Saudis made two profound short- and medium-term decisions. The first came early in the month after Aramco - the Saudi state-owned behemoth - announced a cut to official selling prices (OSPs) for all regions, including lucrative Asian markets, for several crude grades. These included Aramco's flagship Arab Light crude oil. Aramco said cuts in Asia would be as high as $2 per barrel versus the Dubai Oman regional crude benchmark from January levels. 

Prices for Europe would be down by $1.50-$2 per barrel versus Brent January prices, while North American exports would see a drop of $2 per barrel versus the Argus Sour Crude Index (ASCI) used to benchmark U.S. Gulf Coast sour grades. The move weighed on oil prices and seemed like a logical one. 

The Saudis, having voluntarily cut their headline production down to 9 million barrels per day (bpd), want to make sure every single drop of it gets sold in a competitive market receiving plenty of barrels, especially of US light crude. 

The second move came late-January, after Aramco said it was stopping its expansion plans and concentrating on a maximum sustained capacity of 12 million bpd. This immediately generated headlines along the lines of the Saudis acknowledging the end of oil, which, as the Oilholic said via market commentary on several broadcasters, is a load of rubbish. 

Aramco plans to finish the oilfields it has started - namely Berri (250,000 bpd), Dammam (75,000 bpd), Marjan (300,000 bpd) and Zuluf (600,000 bpd). There's only one project cancellation and the company intends to let some other existing fields decline. So with respect, it is nothing more than a pragmatic business move faced with changing medium- to long-term demand in a market the Saudis hope to tap with aplomb for as long as they can.

Away from Saudi moves there were geopolitical flash points aplenty. But none of these managed to move the oil price quite like they used to back when US crude barrels weren't keeping the global markets honest. Following weeks of attacks by Yemen's Iran-backed Houthi rebels on energy and commercial shipping in the Red Sea, the US and UK pounded Houthi positions and infrastructure. The Houthis vowed a response and their sporadic attacks on shipping continued. 

Then on January 28, after over 170 drone and missile attacks on US bases in Syria, Jordan and Iraq since October by Iran-backed proxies in the Middle East, one got through and killed three service personnel. The US' imminent response is to be expected and could mark a dangerous escalation. Where this goes is anybody's guess. But an attack by the US on Iranian soil appears unlikely. (Should it happen, and its hasn't since the 1980s, we could see crude prices around the $90s).

As things stand, crude prices remain range bound. January offered precious little to alter this despite it being one of the most volatile starts to a trading year. Well that's all for now folks. More market thoughts to follow. Keep reading, keep it here, keep it 'crude'! 

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Forbes click here.
To follow The Oilholic on Motley Fool click here.
To follow The Oilholic on Rigzone click here.

© Gaurav Sharma 2024. Photo: Gaurav Sharma on Asharq Business with Bloomberg TV in January 2024 © Asharq Business with Bloomberg TV.

Saturday, November 11, 2023

Can oil really hit $150? (And more!)

As the current crude oil trading year enters its final two months marked by festive breaks and potentially higher consumer demand as the Northern Hemisphere's winter approaches - thoughts inevitably turn to what price levels we will likely encounter in 2024.

With hostilities in the Middle East failing to lift crude prices despite all the talk of risk premiums and potential supply disruptions, being bullish about oil early in 2024 is proving hard. That's because concerns over crude demand are outweighing concerns over supply. 

We're talking muted demand from the economic powerhouses of Germany and China, lower consumer confidence levels in key OECD markets and elevated interest rate levels kept there by major global central banks, especially the US Federal Reserve. 

It therefore came as a surprise to The Oilholic when the World Bank opined that crude prices could hit $150 if hostilities in the Middle East escalate! Here are this blogger's thoughts on that via Forbes. Simply put - don't hold your breath! 

And let's not forget, Brent hasn't even capped a more realistic $100 per barrel level the bulls crave. The benchmark's January 2024 contract is barely higher than current levels, and contracts further out into the summer of next year are even lower. That implies Brent remains in backwardation mode.

Away from the crude price, the latest quarterly earnings posted by energy majors provided plenty of talking points. More so, after the return of megadeals as ExxonMobil swooped for Pioneer Natural Resources and Chevron swooped for Hess Corp. 

Other deals may follow as the energy majors fish for viable plays. It's led many, including this blogger, to wonder if a supermajor itself could be vulnerable? The prime candidate for finding itself in this position is BP; a chronically undervalued supermajor in the Oilholic's opinion. More on the subject here via Forbes

Is it possible? Yes, especially in a industry built on big ticket deals. Will it happen? Probably no, not least down to BP's $100 billion plus valuation (however discounted that may appear to some). But as yours truly noted on Forbes - that the company has had to bat away questions about being a takeover target is pretty extraordinary and indicative of how far it has fallen. Well that's all for now folks. Keep reading, keep it here, keep it 'crude'!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Forbes click here.
To follow The Oilholic on Motley Fool click here.
To follow The Oilholic on Rigzone click here.
To email: journalist_gsharma@yahoo.co.uk  

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

Sunday, November 05, 2017

Those loud political bangs in Riyadh

Riyadh, capital of the world’s most prolific of crude oil producing nation – Saudi Arabia – has been rocked by both physical and political bangs this weekend, the Oilholic notes. Overnight, state TV confirmed the Saudis had intercepted a ballistic missile aimed at Riyadh's King Khaled Airport fired by Yemen’s Houthi rebels.

Witnesses reported loud bangs and parts of the destroyed missile were found in the airport’s car park. The Saudis are leading a campaign to defeat the Houthis, as part of an international air coalition that has bombed the rebel group since 2015. Who else, but Iran, purportedly backs the rebels. 

Following the physical bang, came the political bang later in the day in the form of surprise dismissals and arrests of dozens of Saudi ministers, royals, officials and senior military officers by the country’s Crown Prince Mohammed bin Salman. 

Even by secretive Saudi standards, the move is unprecedented. It points to an audacious attempt by the Prince to consolidate his power base and move closer to his ultimate objective of ascending to the country’s throne.

His father King Salman has been doing his bit too. Under convention, Prince Mohammed bin Nayef, a seasoned royal, was first in line to the throne to succeed Salman. But the King ousted him from the line of succession and stripped him of his role as interior minister.

Earlier in his reign, King Salman had removed his half-brother Prince Muqrin from the line of succession. By April 2015, the king had appointed Prince Mohammed bin Salman as second-in-line to the throne, giving him the title of deputy crown prince, a move that surprised many senior members of the ruling Saud family.

Now through what on paper appears to be an anti-corruption purge, the father-son duo have all but made sure of Mohammed bin Salman’s safe passage to the throne. However, in highly tribal Saudi Arabia, reports suggest the move has not gone down well. 

How it all plays out in terms of geopolitical risk and the impact all of this could have on the oil price remains to be seen. For now at least, it’s just a few crude bangs, albeit at a time the oil price is back above July 2015 levels. That’s all for the moment folks! Keep reading, keep it crude!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Google+ click here.
To follow The Oilholic on IBTimes UK click here.
To follow The Oilholic on Forbes click here.

© Gaurav Sharma 2017. Photo: Oil extraction facility in the Middle East © Shell.

Friday, November 14, 2014

A crash course in geopolitics

Supply side oil and gas analysts including this blogger, as well as traders of (physical not paper) crude oil contracts feel like tearing their hair when some speculator or the other hits the airwaves citing “risk premium”, “instability premium” or more correctly “geopolitical premium” as the pretext for going long on oil no matter how much of the crude stuff is in the pipeline.

As we are currently witnessing one of those rare moments in the oil market's history when surplus supplies and stunted demand are pretty much neutering the speculators’ geopolitical pretext, you might wonder what the fuss is all about.

Make no mistake; while the selective deployment of geopolitical sentiments in betting on the oil price has always been open to debate, the connection between the oil industry and geopolitics is undeniable. And should you need a crash course, academic Klaus Dodds has the answer.

In his contribution about geopolitics for Oxford University PressA Very Short Introduction series, Dodds breezes you through the subject via a concise book of just under 160 pages, split into six chapters.

When covering a subject this vast for a succinct book concept with case studies aplenty, the challenge is often about what to skip, as much as it is about what to include. The author has been brilliant in doing so via a crisp and engaging narrative.

Having enjoyed this book, which is currently in its second edition, the Oilholic would be happy to recommend it to the readers of this blog. As Dodds himself notes: “It’s essential to be geopolitical” and amen to that!

However, be mindful that it is meant to help you understand geopolitics and contextualise geopolitical influences. It is neither a weighty treatise on the subject nor was intended as such. The title itself makes that clear.

Anyone from an analyst to a GCSE student can pick it up and appreciate it as much as those in a hurry to get to grips with the subject or are of a curious disposition. Should you happen to be in this broad readership profile, one suggests you go for it, and better still keep it handy, given the times we live in!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Google+ click here.
To follow The Oilholic on Forbes click here.
To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma, October, 2014. Photo: Front Cover – Geopolitics: A Very Short Introduction © Oxford University Press, June 2014.

Wednesday, August 13, 2014

Not that taut: Oil markets & geopolitical tension

The month of August has brought along a milestone for the Oilholics Synonymous Report, but let’s get going with crude matters for starters as oil markets continue to resist a risk premium driven spike.

The unfolding tragedy in Iraq, Libya’s troubles, Nigerian niggles and the fear of Ebola hitting exploration and production activity in West Africa, are more than enough to provide many paper traders with the pretext to go long and spook us all. Yet, the plentiful supply and stunted OECD demand scenario that’s carried over from last month has made geopolitical tension tolerable. As such its not percolating through to influence market sentiment in any appreciable fashion, bringing about a much needed price correction.

It wasn’t the news of US air strikes on ISIS that drove Brent down to a nine month low this week, rather the cautious mood of paper traders that did it. Among that lot were hedge fund guys n’ gals who burnt their fingers recently on long bets (that backfired spectacularly in July), and resisted going long as soon as news of the latest Iraqi flare-up surfaced, quite unlike last time.

According to ICE data, hedge funds and other money managers reduced net bullish bets on Brent futures to 97,351 contracts in the week to August 5; the lowest on books since February 4. Once bitten, twice shy and you all know why. Brent price is now comfortably within the Oilholic’s predicted price range for 2014.

Away from pricing, the other big news of course is about the megamerger of Kinder Morgan Inc (KMI), Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners Operating (EPBO), into one entity. The $71 billion plus complicated acquisition would create the largest oil and gas infrastructure company in the US by some distance and the country’s third-largest corporation in the sector after ExxonMobil and Chevron.

Moody’s, which has suspended its ratings on the companies for the moment, says generally the ratings for KMP and its subsidiaries will be reviewed for downgrade, and the ratings for KMI and EPBO and their subsidiaries will be reviewed for upgrade.

Stuart Miller, Moody's Vice President and Senior Credit Officer, notes: "KMI's large portfolio of high-quality assets generates a stable and predictable level of cash flow which could support a strong investment grade rating. However, because of the high leverage along with a high dividend payout ratio, we expect the new Kinder Morgan to be weakly positioned with an investment grade rating."

Sticking with Moody’s, following Argentina’s default on paper, the agency has unsurprisingly changed its outlook on the country’s major companies from stable to negative. Those affected in the sector include YPF. However, Petrobras Argentina and Pan American Energy Argentina were spared a negative outlook given their subsidiary status and disconnect from headline Argentine sovereign risk.

Switching tack from ratings notes to a Reuters report, a recent one from the newswire noted that the volume of US crude exports to Canada now exceeds the export level of OPEC lightweight Ecuador. While the Oilholic remains unconvinced about US crude joining the global crude supply pool anytime soon, there’s no harm in a bit of legally permitted neighbourly help. Inflows and outflows between the countries even things out; though Canadian oil exports going the other way are, and have always been, higher.

On the subject of reports, here’s the Oilholic’s latest quip on Forbes regarding the demise of commodities trading at investment banks and another one on the crucial subject of furthering gender diversity in the oil and gas business

Finally, going back to where one began, it is time to say a big THANK YOU to all you readers out there for your encouragement, criticism, feedback, compliments (as applicable) and the time you make to read this blogger’s thoughts. Though ever grateful, one feels like reiterating the gratitude today as Google Analytics has confirmed that US readers have overtaken the Oilholic's ‘home’ readers as of last month.

It matters as this humble blog has moved from 50 local clicks in December 2009 to 148k global clicks (and counting) this year and its been one great journey. The US, UK and Norway are currently the top three countries in terms of pageviews in that order (see right), followed by China, Germany, Russia, Canada, France, India and Turkey completing the top ten. Traffic also continues to climb from Australia, Brazil, Benelux, Hong Kong, Japan and Ukraine; so onwards and upwards to new frontiers with your continuing support. Keep reading, keep it 'crude'!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Google+ click here.
To follow The Oilholic on Forbes click here.
To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo: Oil rig, USA © Shell. Graphics: Oilholics Synonymous Report, July 2014 clickstats © Google Analytics

Saturday, June 15, 2013

A Syrian muddle, Barclays on Brent & more

The Brent forward month futures contract for August spiked above US$106 per barrel in intraday trading on Friday at one point. Most analysts cited an escalation of the Syrian situation and the possibility of it morphing into a wider regional conflict as a reason for the 1%-plus spike. The trigger was Obama administration’s reluctant acknowledgement the previous evening of usage of chemical weapons in Syria. The Oilholic’s feedback suggests that more Europe-based supply-side market analysts regard a proactive US involvement in the Syrian muddle as a geopolitical game-changer than their American counterparts. There is already talk of Syria become as US-Russia proxy war.

Add to that Israel’s nervousness about securing its border, jumpiness in Jordon and behind the scenes manipulation of the Assad regime and Syria by Iran. In an investment note, analysts at Barclays have forecasted Brent to climb back to the Nelson figure of 111. Yet a deeper examination of what the bank’s analysts are saying would tell you that their take is not a reactive response to Syria.

In fact, Barclays cites supply constriction between OPEC members as a causative agent, specifically mentioning on-going problems in Nigeria, Libya and shipment concerns in Iraq. For what its worth, and appalling as it might well be, Syria's conflict is only being priced in by traders in passing in anticipation of a wider regional geopolitical explosion, which or may not happen.

Away from OPEC and Syria, the Sudan-South Sudan dispute reared its ugly head again this week. A BBC World Service report on Thursday said Sudan had alleged that rebels based in South Sudan attacked an oil pipeline and Diffra oilfield in the disputed Abyei region. The charge was denied by South Sudan and the rebels.
 
The news follows Sudan’s call for a blockade of South Sudan's oil from going through the former’s pipelines to export terminals to take effect within 60 days. The flow of oil only resumed in April. Both Sudan and the South are reliant on oil revenue, which accounted for 98% of South Sudan's budget. However, the two countries cannot agree how to divide the oil wealth of the former united state. Some 75% of the oil lies in the South, but all the pipelines…well run north.
 
As the geopolitical analysts get plenty of food for thought, BP’s latest Statistical Review of World Energy noted that global energy consumption grew by 1.8% in 2012, with China and India accounting for almost 90% of that growth. Saudi Arabia remained the world’s top producer with its output at 11.5 million barrels of oil equivalent per day (boepd) followed by Russia at 10.6 million boepd. However, the US in third at 8.9 million boepd gave the “All hail shale” brigade plenty of thought. Especially, as BP noted that 2012 saw the largest single-year increase in US oil production ever in the history of the survey.
 
Moving on to corporate news, Fitch Ratings said Repsol's voluntary offer to re-purchase €3 billion of preference shares will increase the group's leverage, partially offsetting any benefit from the proceeds of its recent LNG assets divestment (revealed in March). This reduces the potential for an upgrade or Positive Outlook on the group's 'BBB-' rating in the near term, the agency added. Repsol's board voted in May to repurchase the preference shares partly with cash and partly with new debt.
 
Finally, Tullow Oil has won its legal battle, dating back to 2010, over tax payable on the sale of oilfields in Uganda. On Friday, the company said a UK court had ruled in favour of its indemnity claim for $313 million in its entirety (when the Uganda’s government demanded over $400 million in capital gains tax after Heritage Oil sold assets in the country to Tullow in a $1.45 billion deal).
 
Heritage said it would now evaluate its legal options and could launch an appeal. When the original deal between Heritage and Tullow was concluded, Tullow paid the Ugandan Revenue Authority $121.5 million – a third of the original $405 million tax demand – and put the remaining $283.5 million into an escrow account.
 
That’s all for the moment folks! The Oilholic has arrived in Belfast ahead of 2013 G8 Summit in Northern Ireland under the UK’s presidency, where Syria, despite the meeting being an economic forum, is bound to creep up on the World leaders’ agenda. As will energy-related matters. So keep reading, keep it ‘crude’!
 
To follow The Oilholic on Twitter click here.
 
 
© Gaurav Sharma 2013. Photo: Veneco Oil Platform, California, USA © Rich Reid / National Geographic.

Thursday, March 28, 2013

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.

Thursday, March 14, 2013

Crude thoughts, an event, few articles & a lecture!

Brent’s decline continues with the forward month futures contract now well and truly below the US$110 per barrel level. In fact, when the Oilholic last checked, a price of US$108.41 was flashing on the ticker. Given that over the past seven days – OPEC, EIA and IEA – have all come out with bearish reports, the current price level should hardly be a surprise.
 
Additionally, both OPEC and IEA appear to be in broad agreement that overall concerns about economic growth in the US and the Eurozone will continue to persist over the short term at the very least. As if that wasn’t enough, the US dollar has reached a seven-month high against a basket of currencies, not least the pound sterling!
 
At such points in recent trading history, geopolitics always lends support to the oil price. Yet further evidence is emerging about the oil & gas community largely regarding the risk premium to be neutral, a theme which this blogger has consistently stressed on since September last year. Many delegates at the recently concluded International Petroleum Week (IP Week) in London, a signature European event, expressed pretty much the same sentiments.
 
Rather than relying on the Oilholic’s anecdotal evidence, here’s an observation from Société Générale analyst Michael Wittner who wrote in an investment note that, “On the geopolitical front, there seemed to be a sort of fatigue (at the IP Week), if not boredom, with the various issues and countries. In addition to Syria and Iran, there was talk about risks in Iraq and Nigeria, and even Chinese-Japanese tensions. Given recent events in Algeria, Egypt, and Mali, we were surprised at how little concern there was about North Africa.”
 
“All agreed that the geopolitical elephant in the room was still Iran, but even here, the fatigue was evident. People were well aware of Israel’s late spring/early summer “deadline”, but they were not excited about it. Some pointed to higher Saudi spare capacity (after recent cuts) and much higher pipeline capacity that could be used to avoid the Straits of Hormuz. Others simply thought that, posturing aside, there was little real appetite for a war against Iran, and that an Iranian bomb was inevitable,” he wrote further. Need we say more?
 
So in summation – tepid crude demand plus fatigued risk premium equals to no short term hope for the bulls! But at least there’s hope for the Brent-WTI spread to narrow, with the former falling and the latter rising on the back of the supply glut at Cushing, Oklahoma showing signs of abating.
 
Away from pricing matters, given that yours truly has been travelling a lot within good old England these past few weeks, there has also been plenty of time to do some reading up on trains! Four interesting articles came up while the Oilholic was experiencing the joys (or otherwise) of British railways.
 
First off, the Wall Street Journal’s Jerry A. Dicolo screams: “Brent barrels to prominence: European oil benchmark poised to overtake WTI as a global gauge.” The Oilholic has some news for the WSJ – Er…Brent is not ‘poised’ to overtake WTI as a global gauge, it has already overtaken it in terms of market sentiment! This blog first mulled the subject as far back as May 2010! Since then, even the EIA has decided to adopt Brent as a benchmark that’s more reflective of global conditions.
 
The second interesting piece of reading material yours truly encountered was a republished Bloomberg wire copy that carried feedback from an Indian refiner. In it, he suggested that the country’s refiners may be forced to halt purchases of Iranian crude as local insurers refuse to cover the risks for any Indian refinery using the Islamic Republic’s oil.
 
Bloomberg cites a certain P.P. Upadhya, Managing Director of the Mangalore Refinery in Southern India as having said, “There’s a problem with getting insurance for refineries processing Iranian oil. If there’s no clarity very soon, we all have to stop buying from Iran or risk operating the refineries without insurance.” Looks like the squeeze on Iran is going into overdrive!
 
Moving on to the third article, here is The Economist's sound take on the late Hugo Chavez’s rotten economic legacy. And finally, a Reuters’ exclusive would have you believe we Brits are planning to bid for US gas to be imported to our shores.
 
An abundance of gas, courtesy of the country’s shale bonanza has certainly lent credence to the US’ gas exporting potential. One would think if the US were to export gas, it would one fine day make its way to the UK. However, a “source” spoken to by Reuters seems to suggest that day is not that far away.
 
Speaking of shale, the Oilholic had the pleasure of listening to a brilliant lecture on the subject from Prof. Paul Stevens, the veteran energy economist and Chatham House fellow. Delivering the Institution of Engineering and Technology’s Clerk Maxwell Lecture for 2013, Prof. Stevens set about exploding the myth of a shale gas revolution taking place in Europe anytime soon.
 
He joked that North Dakota might become the next member of OPEC, but one thing is for certain Poland and other European shale enthusiasts are not getting there any time soon. Apart from the usual concerns, often mulled over by the Oilholic, such as jurisdictional prospection moratoriums and population density, pipeline access, environmental regulations etc. being very different between the US and Europe, the good professor pointed out a very crucial point.
 
“Shale rock formation in Europe is very different from what it is in North America. When ExxonMobil was disappointed in Poland, it was not for want of trying. Rather US technology was found lacking when it came to Polish geology. There is no one size fits all! The American shale revolution got where it is today through massive investment and commitment towards research and development (and over two decades of perseverance). I don’t see that level of commitment in Europe,” he said.
 
Speaking to the Oilholic, following his lecture, Prof. Stevens said the export of US gas to the UK was plausible, but that Asia was a much more natural export market for the Americans. “Plus, let’s not forget that the moment US exports start to rise meaningfully, there is always a chance the likes of Congressman Ed Markey might take a nationalistic tone and try to stunt them,” he added.
 
Quite true, after all we got a glimpse of Markey’s intellect via his ‘Bolshoi’ Petroleum remark! That’s all for the moment folks! Keep reading, keep it ‘crude’!
 
To follow The Oilholic on Twitter click here.
 
© Gaurav Sharma 2013. Sullom Voe Terminal, UK © BP Plc

Sunday, February 17, 2013

Banality of forecasts predicated on short-termism

Oh dear! Oh dear! Oh dear! So the Brent crude price sank to a weekly loss last week; the first such instance in roughly a month. Is the Oilholic surprised? Not one jot. What yours truly is surprised about is that people are surprised! One sparrow does not make spring nor should we say one set of relatively positive Chinese data, released earlier this month, implies bullish trends are on a firm footing.
The Chinese news was used as a pretext by some to go long on the Brent forward month futures contract for March as it neared its closure (within touching distance of US$120 per barrel). And here we are a few days later with the Brent April contract dipping to a February 15 intraday price of US$116.83 on the back of poor industrial data from the US.
 
The briefest of spikes of the week before was accompanied by widespread commentary on business news channels that the price would breach and stay above the US$120 mark, possibly even rise above US$125. Now with the dip of the past week with us, the TV networks are awash with commentary about a realistic possibility that Brent may plummet to US$80 per barrel. You cannot but help laughing when spike n’ dips, as seen over the past few weeks, trigger a topsy-turvy muddle of commentators’ quotes.
 
Sometimes the Oilholic thinks many in the analyst community only cater to the spread betters! Look at the here, the now and have a flutter! Don’t put faith in the wider real economy, don’t examine the macroeconomic environment, just give a running commentary on price based on the news of the day! Nothing wrong with that, absolutely nothing – except don’t try to pass it off as some sort of a science! This blogger has consistently harped on – even at times sounding like a broken record to those who read his thoughts often – that the risk premium provided by the Iranian nuclear standoff is broadly neutral.
 
So much so, that the reason the Brent price has not fallen below US$100 is because the floor is actually being provided by the Iranian situation on a near constant basis. But that’s where it ends unless the country is attacked by Israel; the likelihood of which has receded of late. Syria’s trouble has implications in terms of its civil war starting a broader regional melee, but its production is near negligible in terms of crude supply-side arguments.
 
Taking all factors into account, as the Oilholic did last month, it is realistic to expect a Brent price in the range of US$105 to US$115. To cite a balanced quote, Han Pin Hsi, the global head of commodities research at Standard Chartered bank, said that oil should be trading at US$100 per barrel at the present moment in time were supply-demand fundamentals the only considering factors.
 
In recent research, Hsi has also noted that relatively lower economic growth as well as the current level of tension in the Middle East has already been “priced in” to the Brent price by the wider market. Unless either alters significantly, he sees an average price of US$111 per barrel for 2013.
 
Additionally, analysts at Société Générale note that along with the usual suspects – sorry bullish factors – now priced in, Brent could see some retracement on profit-taking, though “momentum and sentiment are still bullish”. The French bank’s analyst, Mike Wittner, notes that just as the Saudis have (currently) cut production, concerns over prices being “too high” will cause them to increase production. “In short, our view is that Brent has already priced in all the positive news, and it looks and feels toppy to us,” he wrote in an investment note. “Toppy” – like the expression (slang for markets reaching unstable highs whereupon a decline can be expected if not imminent)!
 
On a related note, in its short-term energy outlook released on February 12, the EIA estimates the spread between WTI and Brent spot price could be reduced by around 50% by 2014. The US agency estimates that the WTI will average US$93 and US$92 in 2013 and 2014 respectively, down from US$94 in 2012. It expects Brent to trade at US$109 in 2013 and edge lower to US$101 in 2014, down from the 2012 average of US$112.
 
Elsewhere in the report, the EIA estimates that the total US crude oil production averaged 6.4 million barrels per day (bpd) in 2012, an increase of 0.8 million bpd over 2011. The agency’s projection for domestic crude oil production was revised to 7.3 million bpd in 2013 and 7.8 million bpd in 2014.
 
Meanwhile, money managers have raised bullish positions on Brent crude to their highest level in two years for a third successive week. The charge, as usual, is lead by hedge funds, according to data published by ICE Futures Europe for the week ended February 5.
 
Net-long positions, in futures and options combined, outnumbered net-short positions by 192,195 lots versus a figure of 179,235 the week before; a rise of 6.9% according to ICE’s latest Commitment of Traders report. It brings net-long positions to the highest level since January 2011, the month the current data series began.
 
On the other hand, net-short positions by producers, merchants, processors and users of the crude stuff outnumbered bullish positions by 249,350, compared with 235,348 a week earlier. It is the eighth successive weekly increase in their net-short position, ICE Futures Europe said.
 
Moving away from pricing matters, a few corporate snippets worth flagging up - starting with Gazprom. In a call to investors and analysts earlier this month, the Russian state energy giant finally appeared to be facing-up to greater competition in the European gas market as spot prices and more flexible pricing strategies from Norway’s Statoil and the Qataris put Gazprom’s defence of its conventional oil-indexation pricing policy to the test.
 
Gazprom ceded market share in defence of prices last year, although it did offer rebates to selected customers. However, it appears to be taking a slightly different line this year and aims to cede more ground on prices in a push to bag a higher market share and prop up its overall gas exports by volume.
 
Gazprom revealed that it had paid out US$2.7 billion in 2012 in refunds to customers in Europe, with the company planning another US$4.7 billion in potential price cuts this year in order to make its pipeline gas prices competitive with spot prices and incentivise European customers to make more voluminous gas purchases.
 
Commenting on the move, analysts at IHS CERA noted, “Increasing gas sales volumes by retaining the oil-indexation pricing strategy and then retroactively offering price discounts may be a difficult proposition, however, particularly if Ukraine, Gazprom’s largest gas export customer, continues to reduce its Russian gas purchases in response to Gazprom’s refusal to cut prices.”
 
“Rather than continuing to react to changing market conditions by offering lower prices to customers, Gazprom may need to take a more proactive approach to reducing its gas export prices in order to incentivise customers to buy more gas from the Russian gas firm this year,” they concluded.
 
Finally, TAQA, the Abu Dhabi National Energy Company, said in a statement over the weekend that a new oilfield has been discovered in the North Sea. It reported that two columns of oil have been found since drilling began in November at the Darwin field, about 80 miles north-east of the Shetlands.
 
The field is a joint venture between the Abu Dhabi state-owned company and Fairfield Energy. TAQA acquired some of BP’s North Sea assets for US$1.1 billion in November 2012. That’s all for the moment folks! Keep reading, keep it ‘crude’!
 
To follow The Oilholic on Twitter click here.
 
© Gaurav Sharma 2013. Photo: Andrew Rig, North Sea © BP.  Graph: World crude oil benchmarks © Société Générale Cross Asset Research February 14, 2013.

Friday, January 18, 2013

On finite resources and China’s urges

We constantly debate about the world’s finite and fast depleting natural resources; that everything from fossil fuel to farmable acreage is in short supply. Some often take the line that the quest for mineral wealth would be a fight to the death. Others, like academic Dambisa Moyo take a more pragmatic line on resource scarcity and rationally analyse what is at stake as she has done in her latest book Winner Take All: China’s race for resources and what it means for us.

That the Chinese are in town for more than just a slice of the natural resources cake is well documented. Yet, instead of crying ‘wolf’, Moyo sequentially dissects and offers highly readable conjecture on how China is leading the global race for natural resources be it via their national oil companies, mergers, asset acquisitions, lobbying or political leverage on an international scale.

While cleverly watching out for their interests, the author explains, in this book of just over 250 pages split by two parts containing 10 chapters, that the Chinese are neck-deep in a global resources rush but not necessarily the causative agents of perceived resource scarcity.

However, that they are the dominant players in a high stakes hunt for commodities from Africa to Latin America is unmistakable. For good measure and as to be expected of a book of this nature, the author has examined a variety of tangents hurled around in a resource security debate. The Dutch disease, geopolitics, risk premium in commodities prices, resource curse hypothesis have all been visited versus the Chinese quest by Moyo.

The Oilholic found her arguments on the subject to be neither alarmist nor populist. Rather, she has done something commendable which is examine how we got to this point in the resources debate, the operations of commodity markets and the geopolitical shifts we have seen rather than sensationalise the subject matter. China, the author opines may be leading the race for resources, but is by no means the only hungry horse in town.

Overall, it is a very decent book and well worth reading given its relevance and currency in today’s world. The Oilholic would be happy recommend it to commodities traders, those interested in international affairs, geopolitics, financial news and resource economics. Finally, those who have made a career out of future projections would find it very well worth their while to absorb it from cover to cover.

To follow The Oilholic on Twitter click here. 

© Gaurav Sharma 2013. Photo: Front cover - Winner Take All © Allen Lane / Penguin Group UK.

Tuesday, January 15, 2013

The oil market in 2013: thoughts & riddles aplenty

Over a fortnight into 2013 and a mere day away from the Brent forward month futures contract for February expiring, the price is above a Nelson at US$111.88 per barrel. That’s after having gone to and fro between US$110 and US$112 intra-day.

As far as the early January market sentiment goes, ICE Future Europe said hedge funds and other money managers raised bullish positions on Brent crude by 10,925 contracts for the week ended January 8; the highest in nine months. Net long positions in futures and options combined, outnumbered short positions by 150,036 lots in the week ended January 8, the highest level since March 27 and the fourth consecutive weekly advance.

On the other hand, bearish positions by producers, merchants, processors and users of Brent outnumbered bullish positions by 175,478, down from 151,548 last week. It’s the biggest net-short position among this category of market participants since August 14. So where are we now and where will we be on December 31, 2013?

Despite many market suggestions to the contrary, Barclays continues to maintain a 2013 Brent forecast of US$125. The readers of this blog asked the Oilholic why and well the Oilholic asked Barclays why. To quote the chap yours truly spoke to, the reason for this is that Barclays’ analysts still see the Middle East as “most likely” geopolitical catalyst.

“While there are other likely areas of interest for the oil market in 2013, in our view the main nexus for the transmission into oil prices is likely to be the Middle East, with the spiralling situations in Syria and Iraq layered in on top of the core issue of Iran’s external relations,” a Barclays report adds.

Macroeconomic discontinuities will continue to persist, but Barclays’ analysts reckon that the catalyst they refer to will arrive at some point in 2013. Nailing their colours to mast, well above a Nelson, their analysts conclude: “We are therefore maintaining our 2013 Brent forecast of US$125 per barrel, just as we have for the past 21 months since that forecast was initiated in March 2011.”

Agreed, the Middle East will always give food for thought to the observers of geopolitical risk (or instability) premium. Though it is not as exact a science as analysts make it out to be. However, what if the Chinese economy tanks? To what extent will it act as a bearish counterweight? And what are the chances of such an event?

For starters, the Oilholic thinks the chances are 'slim-ish', but if you’d like to put a percentage figure to the element of chance then Michael Haigh, head of commodities research at Société Générale, thinks there is a 20% probability of a Chinese hard-landing in 2013. This then begs the question – are the crude bulls buggered if China tanks, risk premium or no risk premium?

Well China currently consumes around 40% of base metals, 23% major agricultural crops and 20% of ‘non-renewable’ energy resources. So in the event of a Chinese hard-landing, not only will the crude bulls be buggered, they’ll also lose their mojo as investor confidence will be battered.

Haigh thinks in the event of Chinese slowdown, the Brent price could plummet to US$75. “A 30% drop in oil prices (which equates to approximately US$30 given the current value of Brent) would ultimately boost GDP growth and thus pull oil prices higher. OPEC countries would cut production if prices fall as a result of a China shock. So we expect Brent’s decline to be limited to US$75 as a result,” he adds.

Remember India, another major consumer, is not exactly in a happy place either. However, it is prudent to point out the current market projections suggest that barring an economic upheaval, both Indian and Chinese consumption is expected to rise in 2013. Concurrently, the American separation from international crude markets will continue, with US crude oil production tipped to rise by the largest amount on record this year, according to the EIA.

The independent statistical arm of the US Department of Energy, estimates that the country’s crude oil production would grow by 900,000 barrels per day (bpd) in 2013 to 7.3 million bpd. While the rate of increase is seen slowing slightly in 2014 to 600,000 bpd, the total jump in US oil production to 7.9 million bpd would be up 23% from the 6.4 million bpd pumped domestically in 2012.

The latest forecast from the EIA is the first to include 2014 hailing shale! If the agency’s projections prove to be accurate, US crude oil production would have jumped at a mind-boggling rate of 40% between 2011 and 2014.

The EIA notes that rising output in North Dakota's Bakken formation and Texas's Eagle Ford fields has made US producers sharper and more productive. "The learning curve in the Bakken and Eagle Ford fields, which is where the biggest part of this increase is coming from, has been pretty steep," a spokesperson said.

So it sees the WTI averaging US$89 in 2013 and US$91 a barrel in 2014. Curiously enough, in line with other market forecasts, bar that of Barclays, the EIA, which recently adopted Brent as its new international benchmark, sees it fall marginally to around US$105 in 2013 and falling further to US$99 a barrel in 2014.

On a related note, Fitch Ratings sees supply and demand pressures supportive of Brent prices above US$100 in 2013. “While European demand will be weak, this will be more than offset by emerging market growth. On the supply side, the balance of risk is towards negative, rather than positive shocks, with the possibility of military intervention in Iran still the most obvious potential disruptor,” it said in a recent report.

However, the ratings agency thinks there is enough spare capacity in the world to deal with the loss of Iran's roughly 2.8 million bpd of output. Although this would leave little spare capacity in the system were there to be another supply disruption. Let’s see how it all pans out; the Oilholic sees a US$105 to US$115 circa for Brent over 2013.

Meanwhile, the spread between Brent and WTI has narrowed to a 4-month low after the restart of the Seaway pipeline last week, which has been shut since January 2 in order to complete a major expansion. The expanded pipeline will not only reduce the bottleneck at Cushing, Oklahoma but reduce imports of waterborne crude as well. According to Bloomberg, the crude flow to the Gulf of Mexico, from Cushing, the delivery point for the NYMEX oil futures contract, rose to 400,000 bpd last Friday from 150,000 bpd at the time of the temporary closure.

On a closing note, and going back to Fitch Ratings, the agency believes that cheap US shale gas is not a material threat to the Europe, Middle East and Africa’s (EMEA) oil and gas sector in 2013. It noted that a lack of US export infrastructure, a political desire for the US to be self-sufficient in gas, and the prevalence of long term oil-based gas supply contracts in Europe all suggest at worst modest downward pressure on European gas prices in the short to medium term.

Fitch’s overall expectation for oil and gas revenues in EMEA in 2013 is one of very modest growth, supported by continued, if weakened, global GDP expansion and potential supply shocks. The ratings agency anticipates that top line EMEA oil and gas revenue growth in 2013 will be in the low single digits. There remains a material – roughly 30% to 40% – chance that revenue will fall for the major EMEA oil producers, but if so this fall is unlikely to be precipitous according to a Fitch spokesperson.

That’s all for the moment folks! One doubts if oil traders are as superstitious about a Nelson or the number 111 as English cricketers and Hindu priests are, so here’s to Crude Year 2013. Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

© Gaurav Sharma 2013. Photo: Holly Rig, Santa Barbara, California, USA © James Forte / National Geographic.

Friday, September 28, 2012

Non-OPEC supply, volatility & other matters

One of the big beasts of the non-OPEC supply jungle – Russia – held its latest high level meeting with OPEC earlier this week. Along with the customary niceties came the expected soundbites when Alexander Novak, Minister of Energy of the Russian Federation and Abdalla Salem El-Badri, OPEC Secretary General, met in Vienna on Tuesday.
 
Both men accompanied by “high-level” delegations exchanged views on the current oil market situation and “underscored the importance of stable and predictable markets for the long term health of the industry and investments, and above all, the wellbeing of the global economy.”
 
OPEC is also eyeing Russia’s Presidency of the G-20 in 2013 where the cartel has only one representative on the table in the shape of Saudi Arabia, which quite frankly represents itself rather than the block. However, non-OPEC suppliers are aplenty – Canada, Brazil, Mexico and USA to name the major ones alongside the Russians. The Brits and Aussies have a fair few hydrocarbons to share too.
 
Perhaps in light of that, OPEC and Russia have proposed to broaden their cooperation and discuss the possible establishment of a joint working group focused on information exchange and analysis of the petroleum industry. The two parties will next meet in the second quarter of 2013 by which time, unless there is a geopolitical flare-up or a massive turnaround in the global economy, most believe healthy non-OPEC supply growth would have actually been offset by OPEC cuts.
 
So the Oilholic thinks there’s quite possibly more to the meeting on September 25 than meets the eye…er…press communiqué. Besides, whom are we kidding regarding non-OPEC participants? Market conjecture is that non-OPEC supply growth itself is likely to be moderate at best given the wider macroeconomic climate.
 
Mike Wittner, global head of oil research at Société Générale, notes that non-OPEC supply growth is led by rapid gains in North America: tight oil from shale in the US and oil sands and bitumen in Canada. North American supply is forecast to grow by 1.04 million barrels per day (bpd) in 2012 and 0.75 million bpd in 2013. The reason for the overall higher level of non-OPEC growth next year, compared to 2012, is that this year’s contraction in Syria, Yemen, and South Sudan has  already taken place and will not be repeated.
 
“We are projecting output in Syria and Yemen flat through 2013, with disruptions continuing; we are forecasting only small increases in South Sudan beginning well into next year, as the recent pipeline agreement with Sudan appears quite tenuous at this point. With non-OPEC supply growth roughly the same as global demand growth next year, OPEC will have to cut crude production to balance the market,” he added.
 
With more than anecdotal evidence of the Saudis already trimming production, Société Générale reckons total non-OPEC supply plus OPEC NGLs production may increase by 0.93 million bpd in 2013, compared to 0.75 million bpd in 2012. Compared to their previous forecast, non-OPEC supply plus OPEC NGLs growth has been revised up by 50,000 bpd in 2012 and down by 60,000 bpd in 2013. That’s moderate alright!
 
The key point, according to Wittner, is that the Saudis did not replace the last increment of Iranian flow reductions, where output fell by 300 kb/d from May to July, due to EU and US sanctions. “The intentional lack of Saudi replacement volumes was – in effect – a Saudi cut; or, if one prefers, it was the Saudis allowing Iran to unintentionally and unwillingly help out the rest of OPEC by cutting production and exports,” he concluded.
 
Let’s see what emerges in Vienna at the December meeting of ministers, but OPEC crude production is unlikely to average above 31.5 million bpd in the third quarter of 2012 and is likely to be cut further as market fundamentals remain decidedly bearish. In fact, were it not for the geopolitical premium provided by Iran’s shenanigans and talk of a Chinese stimulus, the heavy losses on Wednesday would have been heavier still and Brent would not have finished the day remaining above the US$110 per barrel mark.
 
On a related note, at one point Brent's premium to WTI increased to US$20.06 per barrel based on November settlements; the first move above the US$20-mark since August 16. As a footnote on the subject of premiums, Bloomberg reports that Bakken crude weakened to the smallest premium over WTI oil in three weeks as Enbridge apportioned deliveries on pipelines in the region in Tuesday’s trading.
 
The Western Canadian Select, Canada’s most common benchmark, also usually sells at a discount to the WTI. But rather than the “double-discount” (factoring in WTI’s discount to Brent) being something to worry about, National Post columnist Jameson Berkow writes how it can be turned into an advantage!
 
But back to Europe where Myrto Sokou, analyst at Sucden Financial Research, feels that very volatile and nervous trading sessions are set to continue as Eurozone‘s concerns weigh on market sentiment. “The rebound on Thursday morning followed growing discussions of a further stimulus package from China that improved market sentiment and increased risk appetite,” she said.
 
However, Sokou sees the market remaining focussed on Spain as news of its first draft budget for 2013 is factored in. “It is quite a crucial time for the markets, especially following the recent refusal from Germany, Holland and Finland to allow ESM funds to cover legacy assets, so that leaves the Spanish Government to fund their Banks,” she added.
 
On the corporate front, Canadians find themselves grappling with the Nexen question as public sentiment is turning against CNOOC’s offer for the company just as its shareholders approved the deal. Many Members of Parliament have also voiced their concerns against a deal with the Chinese NOC. For its part, if a Dow Jones report is to be believed, CNOOC is raising US$6 billion via a one-year term loan to help fund the possible purchase of Nexen. The Harper administration is yet to give its regulatory approval.
 
Meanwhile, the Indian Government has confirmed that one of its NOCs – ONGC Videsh – has made a bid to acquire stakes in Canadian oil sands assets owned by ConocoPhillips with a total projected market valuation of US$5 billion. ConocoPhillips aims to sell about 50% of its stake in emerging oil sands assets, according to news reports in Canada. Looks like one non-OPEC destination just won’t stop grabbing the headlines!
 
Moving away from Canada, Thailand’s state oil company PTTEP has finalised arrangements for its US$3.1 billion share offer for Mozambique’s Cove Energy. Earlier this year, PTTEP won a protracted takeover battle for Cove over Shell. Concluding on a lighter note, the Oilholic has learned that the Scottish distillery of Tullibardine is to become the first whisky distillery in the world to have its by-products converted into advanced biofuel, capable of powering vehicles fuelled by petrol or diesel.
 
The independent malt whisky producer in Blackford, Perthshire has signed a memorandum of understanding with Celtic Renewables Ltd, an Edinburgh-based company which has developed the technology to produce biobutanol from the by-products of whisky production. Now that’s worth drinking to, but it’s all for the moment folks! Keep reading, keep it ‘crude’!
 
© Gaurav Sharma 2012. Oil Drilling site, North Dakota, USA © Phil Schermeister / National Geographic.