The year that was & ‘crude’ predictions for 2014

As crude year 2013 came to a close, the Oilholic found himself in Rotterdam gazing at the Cascade sculpture made by Atelier Van Lieshout, a multidisciplinary contemporary arts and design company.

This eight metre high sculpture, in a city that was once the world's busiest port [before Shanghai overtook it in 2004], comprises of 18 stacked oil drums, which give an appearance of having descended from the sky. They combine to form a monumental column from which the life-size drums drip a viscous mass acquiring the shapes of human figures [see left, click to enlarge].

Perhaps these figures and barrels symbolise us and our sticky relationship with the crude oil markets. For all the huffing and puffing, bears and bulls, predictions and forecasts, dips influenced by macroeconomics and spikes triggered by geopolitics – the year-end Brent crude oil price level came in near where it was at the end of 2012; in fact it was 0.3% lower! On the other hand, the WTI reversed its 7 percent annualised reversal recorded at the end of 2012, to finish round about 8 percent higher in year-over-year terms on the last day of trading in 2013.

Was there an exact science in the good and bad predictions about price levels we saw last year – nope! Does the Oilholic feel both benchmark prices are running contrary to supply-side dynamics given the current macroeconomic backdrop – yup! Did paper barrels stuff the actual merchants waiting at the end of  pipelines to collect their crude cargo – you bet!

Watching Bloomberg TV on January 2 brought home the news that money managers raised their net-long positions for WTI by 4.4 percent in the week ended December 24; the fourth consecutive increase and longest streak since July, according to the broadcaster. This side of the pond, money managers followed their friends on the other side and raised net bullish bets on Brent crude to the highest level in 10 weeks, according to ICE Futures Europe.

Speculative bets that prices will rise [in futures and options combined], outnumbered short positions by 136,611 lots in the week ended December 31, according to ICE's weekly Commitments of Traders report. The addition of 7,670 contracts, or 6 percent, brought the net-long positions to the highest level since October 22. It seems for some, the only way is up, because the fine line between pragmatic trading and gambling has long gone in actual fact.

The Oilholic predicted a Brent price in the range of US$105 to $115 in January last year. As Brent came in flat at year-end, yours truly was on the money. The heart said then, as it does now, even that range – despite being proved correct – was in fact overtly bullish but workable in this barmy paper barrel driven market.

For 2014, hoping that some of the supply-side positivity would be factored in to the mindset of traders, the Oilholic's prediction is for a Brent price in the range of $90 to $105 and WTI price range of $85 to $105. Brent's premium to the WTI should in all likelihood come down and average around $5 barrel.

The Oilholic's opinion is in sync with some, but also quite contrary to many of the bullish City forecasts. That's for them to maintain – this blogger is quietly confident that more Iraqi and Iranian crude will come on the market at some point over 2014. The US isn't importing as much and incremental barrels will henceforth come on to the markets. These will hopefully trigger a much needed price correction.

Of all the price prediction notes in this blogger's Inbox over the first week of 2014, one put out by Steven Wood and Terry Marshall of Moody's appears to be the most pragmatic. Their price assumptions, used for "ratings purposes only rather than as predictions", are for Brent to average $95 per barrel in 2014 and $90 in 2015, compared to $90 per barrel in 2014 and $85 in 2015 for WTI. As both analysts noted: "Oversupply will cool oil prices in 2014."

"A drop in Chinese growth and a surge in OPEC production pose the biggest risks to oil prices as we head into the New Year. Prices could fall if Chinese GDP growth slows significantly and OPEC members go above targeted production of 30 million barrels per day (bpd)," they added.

Away from crude price predictions on a standalone basis and reflecting on the year that was, the US EIA said prices of energy commodities decreased only modestly or increased last year, while prices of non-energy commodities like wheat and copper generally fell significantly.

Natural gas, western coal, electricity and WTI crude prices increased, while Brent, petroleum products and eastern coal prices decreased slightly. "In total, the divergence between price trends for energy and non-energy commodities grew after the summer of 2013. This is in contrast to 2012 when metals prices were stable or experienced slight increases, and a severe drought drove prices of some agricultural commodities higher in the second half of the year," it added.

From the EIA to OPEC where both its meetings in lovely Vienna last year, duly attended by the Oilholic, turned out to be predictable affairs with the "official" quota still at 30 million bpd. And we still don't have a long overdue successor to Secretary General Abdalla Salem El-Badri. The Oilholic also managed to grab a moment with Saudi oil minister Ali Al-Naimi at a media scrum in May. Away from the meetings, the year actually began in terrible fashion for OPEC following a terror attack on an Algerian facility, but easing of tensions with Iran towards the end of the year, was a positive development.

It was also the year in which the Brits not only got excited about their own shale exploration prospects, but also inked their first contract to import proceeds of the US shale bonanza via Sabine Pass. Analysts liked it, Brits cheered it, but US politicians and energy intensive industries stateside didn't. The Keystone XL pipeline project, stuck in the quagmire of US politics, also dragged on.

That yours truly moaned about the banality of market forecasts based on short-termism more than once was not unexpected; a blog on the bankrolling of Thatcherism by the oil and gas sector after the Iron Lady's death in May certainly was.

Apart from routine visits to OPEC, ever the intrepid traveller, this blogger blogged from lands far away and some not so far away. The year began with a memorable visit to the Chicago Board of Trade at the kind invitation of Phil Flynn of Price Futures; a friend and analyst who never sits on the fence in any debate and is most likely to be vindicated as the Brent-WTI spread narrows over 2014.

This was followed by a hop across The Lakes to Toronto to gauge opinion on Keystone XL. Jaunts to the G8 2013 Summit in Northern Ireland, crude ol' Norway, Abu Dhabi and a first visit to Muscat and Khasab to profile Oman's oil and gas sector followed thereafter.

Before calling time on 2013 in Rotterdam, the Oilholic headed out to the Oil Capitals of Europe and North America – chasing the uptick in oilfield services sector activity in Aberdeen, and Platts' response to the Houston Glut in the shape of its new Light Houston Sweet (LHS) benchmark. Moving away from travels, yours truly also reviewed another seven books for your consideration.

For all intents and purposes, it's been a crude old year! And it wouldn't have been half as spiffing without the support and feedback of you all - the dear readers of this humble blog. For those of you, who wanted this blogger on Twitter; you are welcome to follow @The_Oilholic

There goes the look back at Crude Year 2013. As the Oilholic Synonymous Report embarks upon its fifth year on the Worldwide Web and the seventh year of its virtual existence – here's to 2014! That's all for the moment folks! Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo: Cascade sculpture by Atelier Van Lieshout Company, Rotterdam, The Netherlands © Gaurav Sharma, January 1, 2014.

A festive spike, ratings agencies & Omani moves

It's the festive season alright and one to be particularly merry if you'd gone long on the price of black gold these past few weeks. The Brent forward month futures contract is back above US$110 per barrel.

Another (sigh!) breakout of hostilities in South Sudan, a very French strike at Total's refineries, positive US data and stunted movement at Libyan ports, have given the bulls plenty of fodder. It may be the merry season, but it's not the silly season and by that argument, the City traders cannot be blamed for reacting the way they have over the last fortnight. Let's face it – apart from the sudden escalation of events in South Sudan, the other three of the aforementioned events were in the brewing pot for a while. Only some pre-Christmas profit taking has prevented Brent from rising further.

Forget the traders, think of French motorists as three of Total's five refineries in the country are currently strike ridden. We are talking 339,000 barrels per day (bpd) at Gonfreville, 155,000 bpd at La Mede and another 119,000 bpd at Feyzin being offline for the moment – just in case you think the Oilholic is exaggerating a very French affair!

From a French affair, to a French forex analyst's thoughts – Société Générale's Sebastien Galy opines the Dutch disease is spreading. "Commodity boom of the last decade has left commodity producers with an overly expensive non-commodity sector and few of the emerging markets with a sticky inflation problem. Multiple central banks from the Reserve Bank of Australia, to Norges bank or the Bank of Canada have been busy trying to mitigate this problem by guiding down their currencies," he wrote in a note to clients.

Galy adds that the bearish Aussie dollar view was gaining traction, though the bearish Canadian dollar viewpoint hasn't got quite that many takers (yet!). One to watch out for in the New Year! In the wind down to year-end, Moody's and Fitch Ratings have taken some interesting 'crude' ratings actions over the last six weeks. Yours truly can't catalogue all, but here's a sample.

Recently, Moody's affirmed the A3 long-term issuer rating of Abu Dhabi National Energy Company (TAQA), the (P)A3 rating for TAQA's MYR3.5 billion sukuk  programme, the (P)A3 for TAQA's $9 billion global medium-term note programme, the A3 rated debt instruments and the P-2 short-term issuer rating. Baseline Credit Assessment was downgraded to ba2 from ba1; with a stable outlook. It also upgraded the issuer rating of Rosneft International Holdings Limited (RIHL; formerly TNK-BP International) to Baa1 from Baa2.

Going the other way, it changed Anadarko's rating outlook to developing from positive. It followed the December 12 release of an interim memorandum of opinion by the US Bankruptcy Court, Southern District of New York regarding the Tronox litigation.

The agency also downgraded the foreign currency bond rating and global local currency rating of PDVSA to Caa1 from B2 and B1, respectively, and maintained a negative outlook on the ratings. Additionally, it downgraded CITGO Petroleum's corporate family tating to B1 from Ba2; its Probability of Default rating to B1-PD from Ba2-PD; and its senior secured ratings on term loans, notes and industrial revenue bonds to B1, LGD3-43% from Ba2, LGD3-41%.

Moving on to Fitch Ratings, given what's afoot in Libya, it revised the Italy-based Libya-exposed ENI's outlook to negative from stable and affirmed its long-term Issuer Default Rating and senior unsecured rating at 'A+'. 

It also said delays to the production ramp-up at the Kashagan oil field in Kazakhstan were likely to hinder the performance of ENI's upstream strategy in 2014. Additionally, Fitch Ratings affirmed Shell's long-term Issuer Default Rating (IDR) at 'AA' with a stable outlook.

Moving away from ratings actions, BP's latest foray vindicates sentiments expressed by the Oilholic from Oman earlier this year. Last week, it signed a $16 billion deal with the Omanis to develop a shale gas project.

Oman's government, in its bid to ramp-up production, is widely thought to offer more action and generous terms to IOCs than they'd get anywhere else in the Middle East. By inking a 30-year gas production sharing and sales deal to develop the Khazzan tight gas project in central Oman, the oil major has landed a big one.

BP first won the concession in 2007. The much touted Block 61 sees a 60:40 stake split between BP and Oman Oil Company (E&P). The project aims to extract around 1 billion cubic feet (bcf) per day of gas. The first gas from the project is expected in late 2017 and BP is also hoping to pump around 25,000 bpd of light oil from the site.

The oil major's boss Bob Dudley, fresh from his Iraqi adventure, was on hand to note: "This enables BP to bring to Oman the experience it has built up in tight gas production over many decades."

Oman's total oil production, as of H1 2013, was around 944,200 bpd. As the country's ministers were cooing about the deal, the judiciary, with no sense of timing, put nine state officials and private sector executives on trial for charges of alleged taking or offering of bribes, in a widening onslaught on corruption in the sultanate's oil industry and related sectors.

Poor timing or not, Oman ought to be commended for trying to clean up its act. That's all for the moment folks! Have a Happy Christmas! Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo: Oil Rig © Cairn Energy.

Of inequalities, debt, oil & international finance

Rewind the clock back to the morning after the collapse of Lehman Brothers; the Oilholic remembers it vividly. The world's fourth-largest investment bank at the time ran out of options, ideas, saviours and most importantly - working capital - on that fateful morning in September 2008. However, when filing for bankruptcy, it committed one final blunder. The administrators and liquidators - spread as far and as wide as the investment bank's own global operations - failed to coordinate with each other.

Uninstructed, the London administrator froze the bank's assets and panic ensued as investors started pulling out money from all investment banks; even those few with no question marks surrounding them. It was the moment the US sub-prime crisis became a global financial malaise that nearly took the entire system down. 

Since the episode, several books have been written about the when, where, why and how; even what lead to the crisis and the inequity of it all has been dealt with. However, via his book Baroque Tomorrow, Jack Michalowski has conducted a rather novel examination – not just of the crisis alone, but also of our economic health either side of it, the proliferation of international finance and consumer driven innovations.

His claim about our present reality is a bold and controversial one – that virtually every element of the story of the past four decades points to a structural decline, one that's rooted, as in all other historical declines, in massively growing populations faced with declining innovation and lack of new energy converters or new cheap energy sources.

Drawing interesting parallels with what happened in Renaissance and Baroque Europe, Michalowski opines that the so-called Third Wave visions of mass affluence and broad technological progress hailed by Alvin Toffler and other futurists were just a fantasy.

In his book of just under 360 pages, split into four parts, Michalowski writes that in a world where political programmes last only until the next election; progress is flat or worse still non-existent. That all innovations are driven by returns on the money invested, and the major life-changing ones that propelled us onwards and upwards from the Industrial Revolution are already with us. What has followed in their wake are fads delivered to a consumer-led debt-laden world with rising levels of energy consumption. 

According to Michalowski, history proves that we were only rescued from decline and propelled along a new path by the invention of new energy sources and new energy converters – things like agriculture, sailships, windmills, iron ploughs, combustion engines, trains, cars and airplanes, or nuclear reactors – and never by invention of new information processing technologies. IT advances, he argues, usually come late in the historical cycle.

On reading this book, many would remark that the author is over-simplifying the complex issues of innovation, progress and prosperity (or the lack of). Others would say he is bang on. That's the beauty of this work – it makes you think. For this blogger – it was a case of 50:50. There are parts of the book the Oilholic profoundly disagrees with, yet there are passages after passages, especially the ones on proliferation of international finance centres, debt, hydrocarbon usage and pricing, that one cannot but nod in agreement with. 

Perhaps we are wiser in wake of the financial crisis and have turned a corner. That may well be so. But here's a tester – drive away from the glitzy Las Vegas Strip to other parts of the city where you’ll still see streets with plenty of foreclosed homes. Or perhaps, you care to visit the suburbs of Spanish cities littered with incomplete apartment blocks where developers have run out of money and demand is near-dead. Or simply check the inflation stats where you are? And so on.

In which case, is Michalowski wrong in assuming that there is a "de-education and de-skilling of the rapidly pauperizing middle class and dramatic polarization of the society between rich and poor. Very high levels of inequality are proven by history to be absolutely destructive. As malaise sets in, they become a major contributor to decline."

Some of the author's thoughts are hard to take; some of the dark quips – especially one describing Dubai as a Disneyland for grown-ups – make one smirk. None of his arguments are plain vanilla, but they make you turn page after page either in agreement or disagreement. You'll keep going because the book itself is very engaging; even more so in a climate of persistent inflation and stagnant real incomes. 

Michalowski says that unless current trends change dramatically, the next forty years will bring more of the same. If so, we are looking at an entire century of decline in incomes and living standards or a "true Baroque era." Now, whether one buys that or not, the way the author has used history to make a statement on the macroeconomics of our time is simply splendid and a must read.

The Oilholic is happy to recommend it to peers in the world of energy analysis, economists and social sciences students. Even the enthusiasts of digital media might find it well worth their while to pick this book off the bookshelves or download it on their latest gizmo.

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo: Front Cover – Baroque Tomorrow © Xlibris / Jack Michalowski

OPEC holds quota at 30 mbpd, El-Badri stays on

We’ve been here before dear readers, we’ve been here before. Main headline at the conclusion of the 164th OPEC conference here in Vienna is a familiar one. OPEC’s production quota stays at 30 million barrels per day and Secretary General Abdalla Salem El-Badri – long overdue to step down – stays on in his post, as member nations torn between Iranian and Saudi tussles fail to agree on a candidate for the post. So at the end of it all a battle-weary El-Badri, took the stage as usual. Not entirely bereft of a sense of humour, the secretary general had a few quips, the odd joke, brushed off scribes pokes to say that the cartel had considered the global economic outlook which remains “uncertain with the fragility of the Euro-zone remaining a cause for concern.”

 

“We was also noted that, although world oil demand is forecast to increase during the year 2014, this will be more than offset by the projected increase in non-OPEC supply. Nevertheless, in the interest of maintaining market equilibrium, the OPEC decided to maintain the current production level of 30 million bpd.”

 

In taking this decision, OPEC said it had reconfirmed its members’ readiness to swiftly respond to developments which could have an adverse impact on the maintenance of an orderly and balanced oil market.

 

El-Badri's tenure as Secretary General carries on for a period of one year, with effect from January 1, 2014. As the Oilholic noted in an earlier post, OPEC had a chance to send a message but missed a trick here. Despite the threat of incremental non-OPEC barrels, it failed to present a united front leaving El-Badri to carry the can in front of the world’s press and fly the OPEC flag.

 

The man himself though had a thing or two to say or avoid saying. Coming on the latter bit first, El-Badri declined comment on what increasing Iranian production would mean for the overall production quota. He also described incremental non-OPEC supply as "good for global consumers", acknowledged OPEC’s concerns about shale and said he was monitoring the supply side situation.

 

Yet later, he cut short an analyst’s question saying people should not “exaggerate” the impact of incremental or additional project barrels. “You keep going down this track and very soon you will see both prospective and thriving E&P jurisdictions lose their appetite for investing in new fields and enhancing existing facilities.” The Oilholic thinks the Secretary General has a point, albeit the point itself is a bit exaggerated.

 

One key theme to emerge was that OPEC members’ focus for exports was firmly to the East now. Several delegates and El-Badri himself acknowledged that supplies heading to the US – especially from Nigeria, Angola and Venezuela – were being diverted to far Eastern markets. The US it seems “wasn’t a priority” for OPEC in the first place; it’s even less so now. That's your lot from OPEC HQ! Keep reading, keep it ‘crude’!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: OPEC Secretary General Abdalla Salem El-Badri at the conclusion of 164th OPEC meeting of ministers in Vienna, Austria © Gaurav Sharma December 4, 2013.

The acknowledgement: OPEC flags-up US output

There should be no shock or horror – it was coming. Ahead of taking a decision on its production quota, president of the 164th OPEC conference Mustafa Jassim Mohammad Al-Shamali, who is also the deputy prime minister and minister of oil of Kuwait, openly acknowledged the uptick in US oil production here in Vienna.

 

“In the six months that have passed since the Conference met here in Vienna in May, we have seen an increasingly stable oil market, which is a reflection of the gradual recovery in the world economy. This positive development stems mainly from a healthy performance in the US, in addition to the Eurozone countries returning to growth,” Al-Shamali told reporters in his opening remarks.

 

It follows on from an acknowledgement by OPEC at its last summit in May about the impact of shale, which up and until then it hadn’t. But the latest statement was more candid and went further. “Non-OPEC oil supply is also expected to rise in 2014 by 1.2 million barrels per day (bpd). This will be mainly due to the anticipated growth in North America and Brazil,” Al-Shamali added.

 

You can add Canada and Russia to that mix as well even though the minister didn’t.

 

Turning to the wider market dynamics, Al-Shamali said that although the market had started to gradually emerge from the tough economic situation of the past few years, the pace of world economic growth remains slow. “Clearly, there are still many challenges to overcome.”

 

Finally, a few footnotes before the Oilholic takes your leave for the moment. Here is the BBC’s take why OPEC is losing control of oil prices due to US fracking – not entirely accurate but largely on the money. Meanwhile, Nigerian oil minister Diezani Alison-Madueke has just told Platts that her country supports OPEC’s current 30 million bpd crude output ceiling, at least for the next few months until the group's next meeting.

 

Alison-Madueke also said she was keen to see how OPEC saw the impact of the US shale oil and gas boom on itself. "We would like to see that we continue with volumes we have held for the last year or so at least between now and the next meeting. I think that would be a good thing. We would like to see a review of the situation referencing the shale oil and gas to see where we are at this stage as OPEC among other things."

 

Earlier, the Saudi oil minister Al-Naimi poured cold water over the idea of a production cut lest some people suggest that. He sounded decidedly cool on the subject at this morning's media scrum. So that’s three of the ministers saying the quota is likely to stay where it was. The Oilholic would say that removes all doubt. That's all from OPEC HQ for the moment folks, more from Vienna later as we gear up for an announcement! Keep reading, keep it ‘crude’! 

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: OPEC media briefing room, Vienna, Austria © Gaurav Sharma 2013.