The Crude Month of May!

The month of May was an extraordinary one for those following crude price fluctuations. Cumulatively speaking, both the major oil futures markets saw the oil price tumble by nearly a fifth since April 30. Over the last fortnight, the price of oil closed below US$70 a barrel for the first time in 2010 driven down by the Greek debt crisis as well as US inventory build-up.

However, between May 26 and 28, the market witnessed a spectacular rebound when the NYMEX contract for July spiked nearly $7 a barrel. Hence, the weekly rise on the back of a healthy 48 hours came in at 5.6% or $3.93 a barrel. Impressive as it may appear, several market commentators I spoke to on the day seemed reluctant to rule out fresh lows over the course of next week (and well into June).

There’s plenty to spook the markets – Greece debt crisis, the Euro’s woes as a result of it, Spain’s recent debt ratings downgrade and US consumer spending. Brent’s premium to NYMEX, which was markedly visible mid-May, also disappeared by Friday.

Predictably, near-term futures contracts are trading at a discount to more-distant contracts. Prices for the most actively traded NYMEX futures contract fell 14.1% or $12.18 in May, the worst month on record since December 2008. Concurrently, over the same period, the front-month Brent crude contract fell 15.4% or $13.42 a barrel, the highest monthly decline since November 2008.

Overall, May was a tough old month for energy futures in general, with perhaps the notable exception of Natural Gas. Expect more of the same in June.

© Gaurav Sharma 2010. Chart Courtesy © Digital Look/BBC

To Drill or Not to Drill Mr. President?

One cannot but help feeling for President Barack Obama. As a candidate and Democrat nominee for the highest American office, Obama was often sceptical about offshore drilling. While his opponents were screaming “Drill Baby Drill,” the then young senator from Illinois was not convinced for his own reasons – some sound, others well – not all that sound.

As President, facing the ground realities and very real concerns about US energy security, Obama made the correct call on March 31 to permit offshore drilling off the US coastline. His opponents claimed the President was not going far enough. Some on his own side claimed he was pandering to the Republicans.

Sadly, before the dust could settle, on April 20th, an environmentally tragic oil spill in the Gulf of Mexico that followed an explosion on an offshore rig, complicated the scenario further. More so executives, from both - oil giant BP which commissioned the rig and Transocean, one of the world’s largest offshore drilling companies, and the rig's operator - did not acquit themselves well in front of American legislators by trying to shift the blame for the incident.

As both companies were trying their hardest to ensure that they do not endear themselves to the American public, the President summed up the emotions, “The American people could not have been impressed with that display, and I certainly wasn’t...There’s enough responsibility to go around, and all parties should be willing to accept it. That includes, by the way, the federal government.”

Trouble is, even though he says oil exploration and drilling must still be part of US energy strategy, the issue has become more political than ever. Following the spill, Obama announced a moratorium on new offshore drilling projects unless rigs have new safeguards to prevent another disaster.

Governor of California Arnold Schwarzenegger said the accident had caused him to drop his support for new offshore drilling in his state. "You turn on the television and see this enormous disaster. You say to yourself, 'Why would we want to take on that kind of risk?” he added.

Across the political divide politicians are asking the very same questions, albeit not for the same reasons. Let us take things into perspective. No one, not least the author of this blog, or people within or outside the oil world including BP (who may have to foot most if not all of the bill to clean up the mess), are suggesting for a moment that what has happened is not terrible and tragic in equal measure.

However, the spill will make it harder for America to follow an energy policy that could actually deliver long-term satisfaction. Some in political circles would try their best to pander to the voting public’s fears for their own gains. Here is a telling fact - before the latest oil spill began on April 20th; the last “big” oil platform leak in the US was 40 years ago. Exxon Valdez incident, though related, cannot be brought into the equation.

So, while any such incident is regrettable to say the least, the figure not only speaks for itself but also indicates that safety standards have improved markedly. However, the figure is something the politicians risk even raising, let alone rely upon to justify offshore drilling and the list does include the President. The oil spill, will be contained and hopefully soon, but US energy policy is currently in a mess and all at sea. Actually it could be both and that in itself is no laughing matter.

© Gaurav Sharma 2010. Photo Courtesy © The White House website

Shell Q1 2010 Profits up 49%

Following on from BP’s bumper profit announcement on Tuesday, Royal Dutch Shell declared a quarterly profits rise of nearly 50% today. In a corporate announcement, the oil giant said profits for the first quarter of the year came in at $4.9 billion; a 49% appreciation on profit noted over the corresponding quarter of 2009.

A marked improvement in the price of crude, despite current wobbles, meant Q1 2010 profit was also well above the $1.2 billion profit figure noted over Q4 2009. In a statement, Shell chief executive Peter Voser said improved first quarter profits were "driven largely by our own actions," which included new explorations and organic production growth.

Looking ahead, Voser said, "So far in 2010, oil prices have remained firm, and demand for petrochemicals has increased, but refining margins, oil products demand and spot gas prices all remain under pressure. Although there are signs of an improving economic outlook, we are not relying on it."

It goes without saying that the average crude oil price of $75 per barrel seen this year has helped Shell as well as its peers, for it is a far cry from an average price of $41 per barrel seen in wake of the global financial crisis. Furthermore, Voser himself said last month that the era of cheap oil was over. Question is how expensive will it be in the short-term?

© Gaurav Sharma 2010. Photo Courtesy © Royal Dutch Shell

Credit Suisse Revises Oil Price Estimates

Credit Suisse revised its oil price estimates this month. On April 15, in a note to investors, the Swiss bank raised its 2010 oil price estimate from US$70 per barrel to $82.90. Concurrently, the 2011 estimate was raised from $70 to $80. CS analysts noted that $80 per barrel provides “a better balance of an oil price which encourages marginal investment in new production, without crimping demand during the economic recovery phase, than (our) previous forecast of $70 per barrel.”

In a related development, four days later, Bank of America Merrill Lynch noted that the spike in oil prices from $80 per barrel to $87 per barrel came along with a rapid deterioration in the term structure of the WTI market. BoA-ML analysts feel that a surge in demand for storage, as spot oil prices rally, is an unusual event. They suggest that further oil price appreciation is unlikely in the short run.

“Rising on-shore stocks around Cushing, more floating storage in the Middle East, additional non-OPEC crude oil and a partial shutdown of European air space (last week) will likely limit further oil price advances near term. We thus maintain our second quarter 2010 average Brent and WTI crude oil price forecast of $83 per barrel. Looking ahead, we remain structurally bullish and still believe in our average $92 per barrel WTI crude oil forecast for the second half of 2010,” they noted further.

Meanwhile quarterly profits at UK oil giant BP more than doubled in year over year terms, according to results published earlier today. Replacement cost profit for January to March 2010 was $5.6 billion, compared with $2.4 billion for the first quarter of 2009. The figure is also up from the $3.45 billion in profit noted over the fourth quarter of 2009.

© Gaurav Sharma 2010. Photo Courtesy © BP Plc

Cairn’s Indian Find Continues to Excite

Cairn Energy’s oilfields in the Indian state of Rajasthan continue to excite. In a trading statement last week, the company raised its estimate of reserves from 175,000 barrels of oil per day to a potential 240,000 barrels of oil. Cairn’s stock rose nearly 11.5% intraday as the markets greeted the news with much gusto as did the Indian media given the oily needs of the country’s burgeoning economy.

Cairn also hopes the opening of a new 590 km pipeline over the second quarter of 2010, which will connect the Mangala oilfield to Salaya port (in Gujarat state), would further fire-up production. Currently, oil from Mangala is transported by road haulage tankers.

In other trading data, Cairn posted an operating profit of $53 million in 2009, up from $11 million in 2008. Its Chief Executive Sir Bill Gammell also sounded optimistic about the company's prospects in Greenland. Cairn is to prospect for oil at four drilling sites in Baffin Bay and estimates these areas could contain over 4.0 billion barrels of oil.

Sir Bill says, "It’ll take stamina, skill and indeed luck to find hydrocarbons in the area." That was probably his philosophy when he bought his company’s Indian assets from Royal Dutch Shell; and it sure has yielded dividends.

In contrasting fortunes, it seems drilling for the crude stuff off the Falkland Islands coast may not be economically feasible after all the argy-bargy between UK and Argentina. The prospect of oil in the region renewed diplomatic spats with the Argentine Government complaining to the UN and launching fresh claims of sovereignty on the Falkland Islands, over which in went to war with the British and lost.

UK promptly rejected the recent claims on basis of the right of self-government of the people of the Islands "underpinned by the principle of self-determination as set out in the UN charter". The people are happy to be British subjects and have been for over a century. All the caterwauling now sounds foolish and premature.

In a corporate announcement in London on Monday, Desire Petroleum – one of the British companies prospecting for oil in the area – said initial results from its Liz 14/19-1 well, in the North Falkland basin prospection zone, showed quantities of oil may be small and of poor quality.

Shares in Desire, recently named among Deloitte’s upstream upstarts, ended Monday trading in London down nearly 50%. Rockhopper Exploration, another company drilling in the region with a 7.5% interest in the Liz well, saw its shares tumble 25.5%. Other regional players also took a hit across the board. Desire Petroleum will need to drill further and deeper than anticipated if it has the will to find better quantities of oil and gas. "It will not be possible to determine the significance of the hydrocarbons encountered and whether the well will need to be drilled deeper, suspended for testing or plugged and abandoned," the company said.

© Gaurav Sharma 2010. Photo Courtesy © Cairn Energy Plc