OPEC Leaves Production Levels Unchanged!

As widely expected, OPEC announced on Thursday that its members have agreed to keep its official oil production target at 24.84 million barrels a day. OPEC president Wilson Pastor-Morris said that the policy in place since December 2008, when it announced a record supply cut of 4.2 million barrels per day, is here to stay.

The cartel will next meet on December 11 in Quito, Ecuador to discuss the issue again. Despite being by pressed by journalists, OPEC Secretary General Abdalla Salem El-Badri insisted that individual members' quotas need not be published. “We know how each country behaves, the market should be happy with total quotas,” he said.

He added, the ever present issue of compliance with quotas, was an important one. By OPEC's own assement compliance was at 61% but a Reuters report puts the figure at 57%. In an interesting development - perhaps the only surprise of the day - OPEC announced that Iran will take over the rotating presidency of OPEC in 2011 for the first time in 36 years. Iranian petroleum minister Masoud Mir-Kazemi assumes the presidency from January 2011; watch this space!

© Gaurav Sharma 2010. Photo: © Gaurav Sharma, OPEC 157th Meeting, Vienna, Oct 14, 2010

OPEC’s Own Version of He Said, She Said…

Over each of last three years, in the run-up to the cartel's meeting, OPEC Secretary Secretary General Abdalla Salem El-Badri has tended not to give very much away. However, the 157th summit seems to be different; for over the last 6-12 months El-Badri has often stated that OPEC is comfortable with the crude oil price. In fact, he gave quite candid comments in June.

That said the price has remained in the circa of US$75 to US$85 per barrel and is heading higher as the US dollar has weakened in recent weeks. So El-Badri should indeed be comfortable with it.

But of course, no OPEC summit is complete with a bit of the old 'he said, she said'. The most important “he” in question is the Saudi oil minister Ali Al-Naimi who plainly told a media scrum here in Vienna on Wednesday that, and I quote, "Everyone" is happy with the market. To the market that reads like a coded signal he is against increasing output.

The only "she" on the table is of course Nigeria's petroleum minister - Diezani Kogbeni Alison-Madueke – who said OPEC (as always) will be looking at overproduction and non-adherence to quotas, at "this particular conference."

Sheikh Ahmed al-Abdullah al-Sabah of Kuwait when asked how the price of crude was at the moment, gave a short and sweet reply. Quite simply, he noted that, “It’s good.” Concurrently, Venezuelan Energy and Oil Minister Rafael Ramirez told a local TV network that "all" his colleagues agree they should leave the level of production stable.

Since arriving in Vienna, based on the 'he said, she said' rounds, I have had a jolly good natter with eight analysts here and a further three in London. All 11, as well as those at Société Générale expect a rollover in OPEC quotas and no change to actual output.

Finally as the forward month ICE Brent crude contract bounced to the stop-loss at US$84.55, analysts at Société Générale also believe a further range bound market is possible. "According to OPEC, the recent price rally does not reflect oil fundamentals (and we agree)," they wrote in an investment note.

© Gaurav Sharma 2010. Photo: © Shell

Vienna’s Most Oilholic of all Welcomes

As OPEC ministers and the world’s press descend on Vienna for the 157th OPEC meeting on Thursday, I cannot but help remarking that the city itself gives the most oliholic of all welcomes to its visitors whether you arrive by plane, train or automobile – or in my case – all three – but more on that later.

Landing on a night flight at Vienna airport one can get a direct view of an ocean of spotlights and night lamps of the OMV Schwechat refinery. Once you pull out of the airport, and your taxi or bus takes two right turns and hits the motorway, there’s the refinery again and well if you arrive by train say to Wien Meidling or Wien Westbahnhof stations – the oil tankers and carriages along the way simply cannot be missed.

Perhaps its not unusual to find oil and gas infrastructure in proximity of a major oil and gas town, something which quaint old Vienna is not, in my honest opinion. Still its OMV's hub, which is fast becoming a behemoth, or already is one if you asked a Hungarian analyst given its audacious but ultimately unsuccessful bid to acquire MOL in 2007.

Coming on to the subject of me having used planes, trains and automobiles – well I arrived in Vienna from London by plane earlier in the week, dashed off to Budapest for a meeting by train and have passed in front of the Schwechat refinery in automobiles of various descriptions – budget permitting - for the last six years.

It’s good to be back at OPEC, which is fast becoming an annual pilgrimage for me. Nothing about pricing in this blog post, but cant help observing though that OPEC would not change production quotas on Thursday.

© Gaurav Sharma 2010. Photo: Raffinerie Schwechat © OMV Refining & Marketing GmbH

Crude Sort of a Month (So far)

We are nearing the end of September and crude oil just cannot shake off the linkage with perceived (rather than prevalent) risks to the health of the global economy. In fact, for lack of a better phrase - the “on” or “off” risk has been causing price fluctuation for some eight weeks now.

My contacts in the City also voice concerns about the next round of G20 opting for further regulation on commodities trading. Although it is the kind of rhetoric they have indeed heard time and again over the decades; it irks their collective psyche.

Overall, most expect crude oil prices to remain in the range of $73 to $85 until at least Q1 2011. Analysts at Société Générale CIB actually have a much wider ranged forecast to the tune of US$70 to US$85. In the oil business its best to avoid generalisations especially when it comes to forecasts, but a return to a US$100 plus price is not forecast by much of the wider market before Q1 2012 at the earliest.

Furthermore, crude stocks haven’t altered all that much. Société Générale CIB’s Global Head of Oil Research Mike Wittner notes in a recent investment note that:

“Despite 12 months of global economic recovery, stocks are little changed from a year ago, and are still at the top of their five-year range. OECD combined crude and product inventories remain stubbornly high at over 61 days forward cover. In other words, the increase in crude and product consumption over recent quarters has been matched by an increase in supply of about the same magnitude.”

In fact the big story, which Wittner also alludes to in his note, is the surprisingly large increase in supply from non-OPEC exporters while the cartel’s output itself has been stable. Looking ahead to the OPEC summit on Oct 14, which I will be attending in Vienna, the cartel is widely tipped to hold production levels steady at 29.0 million barrels per day.

Elsewhere in this crude world, Moody’s outlined potential Deepwater Horizon disaster liabilities for Transocean in an interesting report published on Monday. The report notes that Transocean’s credit risk has increased due to the disaster, although it is hard to quantify by how much.

While much depends on unknown variables, Transocean's stake is likely to be limited to 10% of the total liabilities, which could reach as much as US$60 billion, Moody's said. The recent downgrade of Transocean's long-term credit rating to Baa3 from Baa2 reflects that.

Kenneth Austin, Vice President & Senior Credit Officer at Moody's, feels that Transocean has sufficient cash, free cash flow and credit arrangements to address a US$6 billion responsibility without losing its investment-grade rating. “But any damages beyond that could force the company to consider ways to raise additional capital," he added.

For now, Transocean's indemnification agreement with BP - the largest partner and operator of the Deepwater Horizon rig and Macondo well - leaves BP responsible for the damages, unless the oil giant challenges the agreement in court, the report said.

Finally, the wider market has got word on what is being touted as the mother of all energy stock floatation’s and the largest share issue in corporate history – i.e. Petrobras’ attempt to raise something in the region of US$64.5 to US$74.7 billion. News emerged on Thursday that the final valuation was US$70 billion.

Following my earlier query, a company spokeswoman told me that Petrobras issued 2.4 billion common shares priced at BRL 29.65 (US$17.12) each and 1.87 billion preferred shares at BRL26.30 (US$15.25) each. The capital from the much delayed IPO will finance development of offshore drilling in the country’s territorial waters. The Brazilian government also gets its fair “share” in return for giving Petrobras access to up to 5 billion barrels of oil.

© Gaurav Sharma 2010. Photo: Oil Drill Pump, North Dakota, USA © Phil Schermeister / National Geographic Society

The Veraciously Detailed Analysis of Prof. Gorelick

The debate over the “peak oil” hypothesis used to keep rearing its head from time to time in media and commodities circles – but of late it has become a bit of a permanent mainstream fixture, with regular discussions in the popular press.

No one discounts the fact that oil is a non-renewable and finite hydrocarbon, but the positions people take on either side of the hypothesis often evoke fierce emotions. Enter Prof. Steven M. Gorelick – the author of the brilliant book – Oil Panic and The Global Crisis: Predictions and Myths.

In my years as a journalist who has written on oil and follows crude markets closely, I feel this book is among the most engaging, detailed and well written ones that I have come across in its genre. Gorelick examines both sides of the argument and allied “crude” topics in some detail. He notes that commentators on either side of the peak oil debate, their respective stances and the arguments are not free of some pretty major assumptions. This pertains, but is not limited, to the complex issue of oil endowments and the methodology of working them out.

The author examines data and market conjecture that both supports and rejects the idea that the world is running out of crude oil. Prior to entering the resource depletion debate, Gorelick charts the landscape, outlines the history of the oil trade and crude prospection and exploration.

Following on from that, he discusses the resource depletion argument followed by a refreshingly well backed-up chapter offering arguments against imminent global oil depletion. The veracity of the research is simply unquestionable and the figures are not substantiated by rants or guesswork, but by a methodical analysis which makes the author's argument sound extremely persuasive. If you are taken in by popular discourse or media chatter about the planet running out of oil, this book does indeed explode more than a few myths.

The text is backed-up by ample figures, graphics and forecasts from a variety of industry recognised sources, journals and organisations. Unlike a straight cut bland discourse, the narrative of this book is very engaging. It may well be data intensive, but if the whole point of the book is substantiating an argument - then the data adds value and makes for an informed argument - for which author deserves full credit.

Above anything else, I find myself in agreement with the author that the US, where production peaked a few decades ago, is a “pincushion of exploration relative to other parts of the world.” Backed-up by data, Gorelick explains that the Middle East, Eastern (& Central) Europe and Africa contain 75% of global crude reserves but account for only 13% of exploratory drilling. This must change.

Every key topic from the Malthusian doctrine to M.K. Hubert's approach, from Canadian Oil sands to drilling offshore and the relative cost of imported oil for consuming nations have been discussed in context of the resource depletion debate and in some detail.

Gorelick correctly notes that while the era of "easy" oil may well be over and how much oil is extracted from difficult sources remains to be seen. I quite agree with the author that the next or shall we say the current stage of extraction and prospection would ultimately be dictated by the price of oil.

Many commodities traders believe a US$50 per barrel price or above would ensure extraction from difficult to reach places. However, that is not to say that a high price equates to the planet running out of oil, according to the author. He writes so from a position of strength having spent years analysing industry data and I find it difficult not to be swayed by the force of his honest arguments.

© Gaurav Sharma 2010. Book Cover © Wiley