Moody’s Says Global Integrated Oil Industry Stable

A report published on Wednesday by Moody’s notes that the global integrated oil and gas industry outlook remains stable and the sector is likely to continue seeing a moderate recovery over the next 12-18 months. However, it adds that the recovery could be more subdued for international oil companies (IOCs).

Oil prices have generally averaged over US$75+ per barrel, and Moody’s has joined ranks with the wider market in noting that the oil sector is well past the bottom of the cycle.

Thomas Coleman, a Senior Vice President at Moody's, says, "The integrated oil companies on the whole enjoy a strong and competitive financial position today; with oil prices trading in a moderate level of about US$75 a barrel as the world's leading economies continue to emerge from the serious downturn of 2008-2009."

Overall, the report notes that the demand for crude oil will remain strong outside the OECD, as – well no prizes for guessing – China and other booming economies, most notably India, steadily increase consumption.

The report also notes that IOCs' earnings and cash flow are improving and could rise by almost 20% over the next 12-18 months - thanks to the H1 2010 revival in crude prices - but these companies remain exposed to fairly weak conditions in the refining sector, which is set to take on even more capacity in 2010 and in coming years.

In addition, high inventories worldwide and recent commodity price volatility amid deepening concerns over Eurozone debt issues further illustrate the risks to the sector, according to Moody's. On the Gulf of Mexico oil spill, the ratings agency noted that the "costs of drilling in the Gulf will escalate dramatically when the US government's ongoing moratorium ends, though deepwater drilling is unlikely to come to permanent halt."

© Gaurav Sharma 2010. Photo courtesy © Shell

Crude Dips but Total Warns of Year-end Price Spike

Crude prices dipped yet again last week, especially towards the end of the week, as bearish trends witnessed in the wider financial markets clobbered commodities. Additionally, the US Department of Energy reported a 1.9 million barrel peak-to-trough decline of crude oil inventories (gasoline and distillate inventories both rose).

The drawdown was above expectations and NYMEX WTI August contract fell 30 cents to US$75.64 a barrel in New York following publication of the report. In fact, crude prices, instead of being the exception, were following the norm as commodities in general suffered their first negative quarter since 2008, if the past three months are anything to go by.

Problem these days is that higher institutional investor participation in commodities markets has without a shadow of doubt, at least in my mind, increased the connection between forex carry trade and stock market fluctuations with commodity assets. Still, most oil market commentators I have spoken to forecast crude prices as well as commodities prices to reverse last week’s losses as the supply and demand scenario has not been fundamentally altered. In fact, it remains strong.

However, Christophe de Margerie, CEO of oil major Total believes crude prices could spike on account of an entirely different reason – the Gulf of Mexico oil spill. Speaking to the Wall Street Journal, he said that while it remained necessary to drill in deep waters to meet global demand for fuel, tougher safety rules could result in higher crude price.

"Total’s policy is clearly towards zero risk. All this means potential additional costs," de Margerie said, adding that oil prices could reach US$90 a barrel by end-2010.

© Gaurav Sharma 2010. Photo courtesy © Cairn Energy Plc

Alcohol & Oil Don’t Mix Well on the Trading Desk!

Unfortunately, some idiots learn the hard way that alcohol and trading do not mix all that well. The crude story doing the rounds in the City these past 24 hours is a mildly humorous one. That is unless you happen to be Steven Noel Perkins, a former futures trader at PVM Oil Futures Ltd. in London.

It seems that in the early hours of the morning on June 30, 2009 following a weekend (plus a Monday) of excessive drinking, the great Mr. Perkins went to his desk at PVM and placed a trade for ICE Brent crude futures contract (for August 2009 delivery) in excess of 7,000 lots representing nearly 7 million barrels of the crude stuff.

High on alcohol, the oil futures broker, whose job was to trade orders on an execution only basis at a firm which did no proprietary trading, accumulated a long outright position so substantial that the price of Brent spiked significantly over the course of the early session.

Perkins initially lied to his employer in order to try and cover up his unauthorised trading. But alas, no boss is that dumb. What’s more, the UK watchdog – the Financial Services Authority (FSA) – came down hard on him. It noted that Perkins' trading manipulated the market by giving a false and misleading impression as to the supply, demand and price of Brent crude and caused the price to increase to an abnormal and artificial level.

So in addition to losing his job, Perkins also got clobbered with a fine of £72,000 for market abuse. The FSA also banned him from working in the financial services industry.

Alexander Justham, director of markets at the FSA, said, "We view market manipulation extremely seriously. Perkins' trading caused disruption to the market and has been met with both a fine and prohibition. This reinforces the fact that a severe sanction will apply in cases of market manipulation, even where no profit is made. Perkins' drunkenness does not excuse his market abuse. He has been banned because he is not a fit and proper person to be involved in regulated activities and his behaviour posed a risk to the proper functioning of the market."

Oh dear! However, there is a silver lining. Immediately after the incident, Perkins joined a rehabilitation programme for alcoholics and has since stopped drinking. The FSA considers that it is possible that Perkins may be rehabilitated over time and could be fit and proper again in the future.

The ban has therefore been limited to a minimum term of 5 years, and his fine reduced from £150,000 to £72,000 resulting from a combination of not causing Perkins serious financial hardship as well as taking account of his desire to settle his case early under FSA's executive settlement procedures.

He’ll drink to that! Or maybe not!

© Gaurav Sharma 2010. Graphic © Gaurav Sharma 2010

OPEC 'Comfortable' with Oil Prices

OPEC appears to be comfortable with the current price of oil, presently trading at US$ 75+ per barrel, according to the cartel’s Secretary General Abdalla Salem El-Badri.

Speaking to journalists, prior to a meeting with European Union representatives, he said, “Current prices are comfortable. I don't see any change in the production; I don't see any meeting coming before the set-up meeting in October (viz. 14)."

El-Badri added there was plenty of oil in the supply chain and that and discipline was needed among OPEC member countries when it came to compliance with production quotas. He felt compliance was recently around 53%, and said he doesn't see the level falling below that.

His comments, while noteworthy, hardly come as a surprise. The OPEC secretary general also said that oil giant BP was “too big” to be pushed to a Chapter 11 bankruptcy in the US following the Gulf of Mexico oil spill which is yet to be plugged. However, he added that the oil spill may impact crude prices in the long-term if regulation becomes too strict and projects get cancelled or delayed.

On the sidelines of El-Badri’s arrival in Brussels, news emerged that energy giant Total has stopped petrol deliveries to Iran, bowing to pressure over Iran's nuclear programme. A spokeswoman for Total confirmed the move on Monday evening after the US Congress had earlier proposed unilateral sanctions that could punish companies doing business with Iran.

Additionally, Reuters reported that Repsol had withdrawn from a contract it won with Royal Dutch Shell to develop the South Pars gas field in southern Iran. Despite, being a leading member of OPEC and a major oil exporting country Iran suffers from a severe lack of refinery capacity and depends on petrol imports for over 30% of its domestic consumption according to industry estimates.

© Gaurav Sharma 2010. File Photo © Gaurav Sharma 2008 - OPEC Secretary General Abdalla Salem El-Badri (right) with Former OPEC President Chakib Khelil (left)

Stop Press: India Getting Rid of Fuel Subsidies!

I must admit that I never once thought this was achievable. Given India’s crazy domestic politics it may yet not happen. However, if local media reports are to be believed, the Indian government has taken the first constructive steps in its history as an independent nation to get rid of petrol subsidies.

The country’s oil secretary Sthanunathan Sundareshan told reporters on Friday, that not only petrol, but diesel and kerosene prices would be freed from the shackles of government price controls. What differentiates the present drive from past murmurings is that for a change the government is willing to provide figures on this occasion.

Apparently by lifting price controls, petrol prices would rise by INR3.5 (£0.05), diesel by INR2.00 and kerosene by INR3.00. Furthermore, government ministers have agreed that the market would henceforth drive the price(s).

Protests, marches, agitations, you name it - have already been planned. Everyone from the Communists to Hindu nationalists are in a strop (real or artificial), according to NDTV, an Indian news broadcaster. The commitment of the government cannot be faulted, but Indian politicians always follow short-term populist agenda where such a move would not sit well, especially as it is a coalition government that is presently running the world’s largest democracy.

Still, the move is long overdue and the need to cut the country’s budget deficit is pressing. India's fiscal deficit is forecast to hit 5.5% of GDP by 2010-11. Whether ridding the nation of fuel subsidies will play a part in cutting it remains to be seen.

© Gaurav Sharma 2010. Photo Courtesy © IndianOil Corporation Ltd.