The 2013 G8 summit, Syria & crude prices

There is a certain measure of positive symbolism in being here in Northern Ireland for the 2013 G8 summit. Who would have imagined when the Good Friday agreement was signed in 1998, that 15 years later the then sectarian strife-torn province would host the leaders of the eight leading industrialised nations for their annual shindig?

That point was not lost on US President Barack Obama, among the few who didn’t express apprehensions, when UK PM David Cameron announced the venue for the summit last year. Cameron wanted to send a message out to the world that Northern Ireland was open for business and based on what yours truly has seen and heard so far, that's certainly a view many share.

 

Addressing an audience of students in Belfast, Obama said, "Few years ago holding a summit of world leaders in Northern Ireland would have been unthinkable. That we are here today shows the progress made in the path to peace and prosperity [since 1998]."

"If you continue your courageous path towards permanent peace, and all the social and economic benefits that come with it, that won't just be good for you. It will be good for this entire island, for the United Kingdom, for Europe; and it will be good for the world," he added.

Here we all are in Belfast heading to a quaint old town called Enniskillen. Of course, the Oilholic won’t be making his way there in a style befitting a president, a prime minister or a gazillion TV anchors who have descended on Northern Ireland, but get there - he most certainly will - to examine the 'cruder' side of things.

It has barely been a year since the G8 minus Russia (of course) griped about rising oil prices and called on oil producing nations to up their production. "We encourage oil producing countries to increase their output to meet demand. We stand ready to call upon the International Energy Agency (IEA) to take appropriate action to ensure that the market is fully and timely supplied," the G7 said in a statement last August.

Of course since then, we’ve had the US 'Shale Gale', dissensions at OPEC and rising consumption of India and China according to the latest data. The smart money would be on the G7 component of the G8 not talking about anything crude, unless you include the geopolitical complications being caused by Syria, which to a certain extent is overshadowing a largely economic summit.

That wont be a shame because its not for politicians to fiddle with market mechanisms. Nonetheless, the Brent forward month futures touched a 10-week high close to US$107 a barrel on Monday before retreating. Despite a lull, if not a downturn, in OECD economic activity, the benchmark remains in three figures.

Syria's impact on oil markets is negligible, but a prolonged civil war there could affect other countries in the Middle East, worse still drag a few oil producers in. Yet a stalemate between Russian President Vladimir Putin and the West has already become apparent here at the G8. There will, as expected, be no agreement on Syria with the Russians supporting the Assad regime and the West warily fretting over whether or not to supply the Syrian rebels with arms.

Away from geopolitics and the G8, in an investment note to clients, analysts at investment bank Morgan Stanley said the spread between WTI and Brent crude will likely widen in the second half of 2013, with a Gulf Coast "oversupply driving the differential".

The banks notes, and the Oilholic quotes, "WTI-Brent may struggle to narrow below US$6-7 per barrel and likely needs to widen in 2H13 (second half 2013)." That’s all for the moment from Belfast folks, as the Oilholic heads to Enniskillen! In the interim, yours truly leaves you with a view of Belfast's City Hall. Keep reading, keep it 'crude'

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© Gaurav Sharma 2013. Photo: City Hall, Belfast, Northern Ireland © Gaurav Sharma, June 17, 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’!

 

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To email: gaurav.sharma@oilholicssynonymous.com

 

© Gaurav Sharma 2013. Photo: Veneco Oil Platform, California, USA © Rich Reid / National Geographic.

OPEC & the downward bias in Black Gold’s value

The OPEC ministers have packed-up and left with no real surprises as the cartel maintained its daily output at 30 million barrels per day (bpd). But in the absence of any real surprises from OPEC, the downward bias in the direction of leading oil futures benchmarks is getting stronger, given the perceived oversupply and a flat, if not dicey, macroeconomic climate. The Brent forward month futures contract plummeted to nearly US$100, seeing a near 2.5% dip from last week (click on graph to enlarge). Given that the trading community had already factored in the outcome of the 163rd OPEC meeting even before it concluded, most appear to be waiting to see whether the US Federal Reserve continues with its monetary stimulus programme. Even if it does so, given the macroeconomic permutations, it is not worth holding your breath for a ‘crude’ bounceback.

 

Far from cutting production, there seem to be murmurs and concern in the hawkish camps of Iran and Venezuela about constantly improving production levels in Iraq. Abdul Kareem al-Luaibi, Iraq’s oil minister, confirmed at a media scrum in Vienna that the country plans to start production at two of its largest oilfields within “a matter of weeks.”

 

Production commencement at Majnoon (which is imminent) and Gharraf (due in July), followed by a third facility at West Qurna-2 (due by December if not earlier) would lift Iraqi capacity by 400,000 bpd according to al-Luaibi. The country’s current output is about 3.125 million bpd. The additional capacity would bolster its second position, behind Saudi Arabia, in the OPEC output league table.

 

The Iraqis have a monetary incentive to produce more of the crude stuff. Sadly for OPEC, it will come at a time the cartel does not need it. Instead of adherence, there will be further flouting of the recently agreed upon quota by some members. Iraq is not yet even included in the quota (and may not be until late into 2014).

 

Non-OPEC supply is seeing the ranks of the usual suspects Russia and Norway, joined ever more meaningfully by Brazil, Kazakhstan, Canada and not to mention (and how can you not mention) – the US, courtesy of its shale supplies and more efficient extraction techniques at Texan conventional plays. So a downward bias will prevail – for now.

 

In fact, Morgan Stanley did not even wait for the OPEC meeting to end before downgrading oil services firms, mostly European ones, based on the conjecture that IOCs as well as NOCs (several of whom hail from OPEC jurisdictions) would allocate relatively lower capex towards E&P.

 

Robert Pulleyn, analyst at Morgan Stanley, wrote and the Oilholic quotes: “With oil prices the key determinant of industry operating cash flow, and given our expectation for an increasingly range bound price environment, we expect industry-operating-cash-flow growth to fall from 14% compound annual growth rate (since 2003) to about 3% in the future. We expect capex growth to fall to around 5% a year to 2020, compared to 18% compound annual growth rate since 2003.”

 

Of the five it downgraded on Thursday – viz. Vallourec, SBM Offshore, CGG Veritas, TGS-NOPEC and Subsea 7 – only the latter avoided a dip in share price following the news. However, Morgan Stanley upgraded John Wood Group, saying it is better positioned to withstand a lower growth outlook for industry spending.

 

As for the price of the crude stuff itself, many analysts didn’t wait for OPEC either with Commerzbank, Société Générale and Bank of America Merrill Lynch (BoAML) all sounding bearish on Brent. BoAML cut its Brent crude price forecasts to $103 per barrel from $111 for the second half of 2013, citing lower global oil demand, rising supplies and higher inventories. The bank expects the general weakness to persist next year and reduced its 2014 average Brent price outlook from $112 to $105 per barrel. So there you have it and that’s all from Vienna folks!

 

Since it’s time to say Auf Wiedersehen, the Oilholic leaves you with a view of the city’s Irrgarten and Labyrinth at the Schönbrunn Palace grounds (see right). Once intended for the amusement of Austro-Hungarian royalty and their guests, this amazing maze is now for the public’s amusement.

 

While visitors to this wonderful place are getting lost in a maze for fun, OPEC ministers going round in circles over a key appointment to the post of Secretary General is hardly entertaining. At such a challenging time for it, the 12-member oil exporters’ club could do with a bit of unity. Yet it cannot even unite behind a single candidate for the post – something which has been dragging on for a year – as rivals Iran and Saudi Arabia continue to hold out for their chosen candidate for the post. Furthermore, it’s taken an ugly sectarian tone along Shia and Sunni lines.

 

Worryingly, this time around, neither the Saudis nor the Iraqis are in any mood for a compromise as the rest of the 10 members wander around in a maze feeling dazed about shale, internal rivalries, self interest and plain old fashioned market anxieties. The Oilholic maintains it’s premature to suggest that a rise in unconventional production is making OPEC irrelevant, but its members are unwittingly trying really hard to do just that! Keep reading, keep it ‘crude’!

 

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© Gaurav Sharma 2013. Graph: World crude oil futures benchmarks to May 25, 2013 © Société Générale. Photo: Irrgarten & Labyrinth, Schönbrunn Palace, Vienna, Austria © Gaurav Sharma 2013.

As expected OPEC quota stays at 30 mbpd!

As widely expected and in line with market expectations, the 163rd OPEC meeting of ministers ended with the 12 members of the oil exporting club keeping their official collective production quota right where it was – at 30 million barrels per day (bpd).

 

OPEC noted that the “relative steadiness” of crude oil prices during 2013 (to-date) was an indication that the market was adequately supplied, with “the periodic price fluctuations being a reflection of geopolitical tensions.”

 

However, the cartel felt that whilst world economic growth was projected to reach 3.2% in 2013, up from 3% in 2012, downside risks to the global economy, especially in the OECD region, remain unchecked.

 

OPEC said that world oil demand is expected to rise from 88.9 million bpd in 2012 to 89.7 million bpd in 2013, driven “almost entirely” by the non-OECD regions. It also projected non-OPEC supply to grow by 1.0 million bpd.

 

OPEC Secretary General Abdalla Salem el-Badri said, “Taking these developments into account, the second half of the year could see a further easing in fundamentals, despite seasonally-higher demand. In light of the foregoing, we have in decided that member countries should adhere to the existing production ceiling of 30 million bpd.”

 

El-Badri was not prepared to discuss the individual members’ quotas, a figure which OPEC no longer releases for publication. The Secretary General also revealed that no agreement was reached over the election of his successor with the same three candidates – viz the two protagonists Majid Munif (Saudi Arabia) and Gholam-Hussein Nozari (Iran) with compromise candidate Thamir Ghadban (an Iraqi official) – being in the frame.

 

“The candidates remain the same, but if a fresh name comes up then we will examine his/her credentials in the usual way,” the Secretary General said. In his response to the debate about shale’s impact on OPEC members’ fortunes and a possible rise in their spare capacity, El-Badri said the impact of unconventional oil production remains uncertain and if it resulted in a rise in OPEC’s spare capacity then there was no reason to be alarmed.

 

“I am in the business of conventional. The way I see it is that if it is a causative factor in a rise in OPEC’s spare capacity then I say why not? What’s the harm? The International Energy Agency (IEA) cannot have it both ways. Before the shale debate began, the agency expressed alarm at the perceived lack of OPEC’s spare capacity. Now when there is a perception that our spare capacity would rise, they again see it as a problem,” he added.

 

El-Badri said OPEC members would, if required, take steps to ensure market balance and reasonable price levels for producers and consumers, and respond to developments that might place oil market stability in jeopardy. OPEC said its next meeting will convene in Vienna, Austria, on Dec 4, 2013. That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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© Gaurav Sharma 2013. OPEC Secretary General Abdalla Salem el-Badri speaks at the conclusion of the 163rd OPEC meeting of ministers © Gaurav Sharma, May 31, 2013.

Saudi oil minister & the Oilholic’s natter

Saudi Arabia’s oil minister Ali Al-Naimi said the global oil market remains well supplied, in response to a question from the Oilholic. Speaking here in Vienna, ahead of the closed session of oil ministers at the 163rd OPEC meeting, the kingpin said, “The supply-demand situation is balanced and the world oil market remains well supplied.”

Asked by a fellow scribe how he interpreted the current scenario. “Satisfactory” was the short response. Al-Naimi also said, “Enough has been said on shale. North American shale production adds to supply adequacy. Is it a bad thing? No. Does it enter into the geopolitical equation and hegemony? Yes of course. Geopolitics has evolved for decades along with the oil industry and will continue to. What’s new here?!” And that, dear readers, was that.

Despite being pressed for an answer several times, Al-Naimi declined to discuss the subject of choosing a successor to OPEC Secretary General Abdalla Salem El-Badri.

 

The Saudis are expected to battle it out with the Iranians for the largely symbolic role, but one that is nonetheless central to shaping OPEC policies and carries a lot of prestige. As in December, the Saudis are proposing Majid Munif, an economist and former representative to OPEC. Tehran wants its man Gholam-Hussein Nozari, a former Iranian oil minister, installed. Compromise candidate could be Iraq’s Thamir Ghadban.

 

The tussle between Iran and Saudi Arabia about the appointment has been simmering for a while and led to a stalemate in December. As a consequence, El-Badri’s term was extended. Anecdotal evidence suggests the Iranians, as usual, are being difficult.

Saudi Oil mins al-Naimi: Oil mrkt supply-demand situation ideal; equation is balanced & market remains well supplied twitter.com/The_Oilholic/s…
— Gaurav Sharma (@The_Oilholic) May 31, 2013

More so, Al-Naimi appeared to the Oilholic to be fairly relaxed about the Shale ruckus, but the Iranians are worried about perceived oversupply. (Only the Nigerians appear to be jumpier than them on the subject of shale). Iran's oil exports, it must be noted, are at their lowest since 2010 in wake sanction over its nuclear programme.

Away from the tussle, Abdel Bari Ali Al-Arousi, oil minister of Libya and alternate President of the OPEC Conference, said the world oil demand growth forecast for 2013 is expected to increase by 0.8 million barrels per day (bpd).

Total non-OPEC supply has seen a slight upward adjustment to 1.0 million bpd for the year. “This situation is likely to continue through the third and into the fourth quarters as we head into the driving season. Our focus will remain on doing all we can to provide stability in the market. This stability will benefit all stakeholders and contribute to growth in the world economy. However, as we have repeatedly said, this is not a job for OPEC alone. Every stakeholder has a part to play in achieving this,” he added.

Rounding off this post, on the subject of hegemony, it always makes the Oilholic smirk and has done so for years, that the moment the scribes are let in - the first minister they rush for (yours truly included) is the man from Saudi Arabia. That says something about hegemony within OPEC. That's all for the moment from Vienna folks, updates throughout the day and the weekend! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2013. Saudi Arabia’s oil minister Ali Al-Naimi speaking at the 163rd OPEC meeting of ministers © Gaurav Sharma, May 31, 2013.