No OPEC Production Change & No Surprise

As expected, no major surprises came out of OPEC's 158th Meeting in the Ecuadorian capital Quito where the cartel left its production quotas unchanged this weekend. Some four of the twelve oil ministers from member nations – namely those of Kuwait, Qatar, Nigeria and Iraq – did not even turn up and sent junior officials instead.

It was interesting listening to an APTV recording of a press conference prior to the commencement of the OPEC meeting wherein none other than the Saudi Arabian Oil Minister Ali al-Naimi told a media scrum, “You guys really worry too much about prices. They go up, they go down. What’s new?”

We ask only because there is the little matter of the price of black gold capping US$90 per barrel either side of the pond for the first time in two years. He predicted a few seconds later that there would be no increase in OPEC production and here we are a few days hence. Interestingly, on the same day as Naimi was chiding reporters in Quito, the Paris-based International Energy Agency (IEA) opined that OPEC may come under pressure over 2011 to raise production.

IEA currently expects oil demand in 2011 to rise by 1.3 million bpd; 260,000 bpd more than previously forecast. In an accompanying statement, it said, "Although economic concerns remain skewed to the downside, not least if current high prices begin to act as a drag on growth, more immediately demand could surprise to the upside."

Overall, Global oil supply reached 88.1 million barrels a day last month, hitherto its highest ever level. Furthermore, the IEA forecasts world demand to expand 1.5 per cent in 2011 to 88.8 million barrels a day, which if recorded would also be a record. Its medium term projections for world oil demand for 2009-2015 is an average rise of 1.4 million bpd each year; an increment from its June assessment.

© Gaurav Sharma 2010. Photo: OPEC Logo © Gaurav Sharma

Black Gold @ US$90-plus! No, Surely? Is it?

“You can’t be serious,” was often the trademark thunder of American tennis legend John McEnroe when an umpiring decision went against him. In a different context some commodities analysts might be thundering exactly the same or maybe not. In any case, deep down Mr. McEnroe knew the umpire was being serious.

On a not so sunny Tuesday afternoon in London, ICE Futures Europe recorded Brent crude oil spot price per barrel at US$91.32. This morning the forward month Brent futures contract was trading around US$90.80 to US$91.00. While perhaps this does not beggar belief, it certainly is a bit strange shall we say. I mean just days ago there was the Irish overhang and rebalancing in China and all the rest of it – yet here we are. Société Générale’s Global Heal of Oil research Mike Wittner believes the fundamental goalposts may have shifted a bit.

In a recent note to clients, he opines that underpinned by QE2, the expected environment of low interest rates and high liquidity next year should encourage investors to move into risky assets, including oil. “With downward pressure on the US dollar and upward pressure on inflation expectations, the impact should therefore be bullish for crude oil prices,” he adds.

The global oil demand growth for this year has been revised up sharply to 2.4 Mb/d from 1.8 Mb/d previously by SGCIB, mainly due to an unexpected surge in Q3 2010 OECD demand. The demand growth for next year has also been increased, to 1.6 Mb/d from 1.4 Mb/d previously (although still, as expected, driven entirely by emerging markets).

What about the price? Wittner says (note the last bit), “For 2011, we forecast front-month ICE Brent crude oil near US$93/bbl, revised up by $8 from $85 previously. With continued low refinery utilisation rates, margins are still expected to be mediocre next year, broadly similar to this year. The oil complex in 2011 should again be mainly led by crude, not products.”

YooHoo – see that – “mainly led by crude, not products.” Furthermore, SGCIB believes crude price should average US$95 in H2 2011, in a $90-100 range. Well there you have it and it is a solid argument that low interest rates and high liquidity environment is bullish for oil.

Elsewhere, a report published this morning on Asian refining by ratings agency Moody’s backs up the findings of my report on refinery infrastructure for Infrastructure Journal. While refinery assets are rather unloved elsewhere owing to poor margins, both the ratings agency and the Oilholic believe Asia is a different story[1].

Renee Lam, Moody's Vice President and Senior Analyst, notes: “Continued demand growth in China and India in the short to medium term will be positive for players in the region serving the intra-Asia markets. Given the stabilization of refining margins over the next 12 to 18 months, a further significant deterioration of credit metrics for the sector is not expected.”

While Moody's does not foresee a significant restoration of companies' balance-sheet strength in the near term, they are still performing (and investing in infrastructure) better than their western, especially US counterparts.

[1] Oil Refinery Infra Outlook 2011: An Unloved Energy Asset By Gaurav Sharma, Infrastructure Journal, Nov 10, 2010 (Blog regarding some of the basic findings and my discussion on CNBC Europe about it available here.)

© Gaurav Sharma 2010. Graphic: ICE Brent Futures chart as downloaded at stated time © Digital Look / BBC, Photo: Oil Refinery © Shell

Some Crude Chatter from Moody’s & Other Stuff

There’s been some interesting chatter from Moody’s these past seven days on all things crude. Some of these stood out for me. Early last week in a note to clients, the rating agency opined that CNOOC Ltd's Aa3 issuer and senior unsecured ratings would not be immediately affected by the Chinese company's additional equity investment of US$2.47 billion in its 50% joint-venture Bridas Corp.

The investment represents CNOOC's share of funding contributions for Bridas to purchase a remaining 60% interest in Pan American Energy, which is engaged in E&P ops in South America. Bridas plans to fund 70% of its purchase by equity and 30% by debt or additional contributions from shareholders.

CNOOC is funding its equity contribution to Bridas with internal resources on hand. The transaction would give it an additional 429 million BOE of proved reserves and 68,000 bpd daily production in South America, according to Moody’s. Completion of the transaction is expected to take place during H1 2011, that’s of course government and regulatory approvals pending.

However, the crude chatter of the week not just from Moody's, but from the entire market was the agency’s interesting analytical take on oil sands producers’ operating considerations. In a report titled – Analytical Considerations for Oil Sands Producers – the agency notes that while comparing oil sands development and production projects to conventional development and production projects, the former have much larger upfront development costs[1].

Such projects are more likely to incur construction cost overruns, and quite simply take much longer to reach breakeven cash flow. Other features include higher cash operating costs per barrel of oil equivalent, very long reserve life and low maintenance capital expenditures once in production, particularly of mining oil sands operations, the report said.

One might say that parts of the report are predictable but it must be noted that in analysing companies with relatively large oil sands exposure, Moody's balances the negative aspects of the difficult construction period against the anticipated long-term positive contributions from these assets. So well, on balance, I found the principal tenets to be very convincing.

Let us face it, whether peak oil will be here soon or not, “easy oil” (interchangeable with cheap oil) is most certainly gone. Cost overruns are unlikely to deter big oil. So far Shell has invested just under US$10 billion (River Oil Sands), Chevron US$9 billion (Athabasca), ExxonMobil US$5 billion (Kearl Oil sands investment) and BP is said to be catching up via its Sunrise oil sands investment.

Elsewhere, Desire Petroleum’s saga of will they find oil in the Falklands Is. or won't they or worse still when will they give up continues. Its share price saw wild swings and ended in a damp squib (haven’t we heard that before).

On the left, for the umpteenth time, here is Desire’s undesirable share chart (see the day's price nose-dive). To quote The Daily Mail’s inimitable Geoff Foster, “Many professional punters are gluttons for punishment. They continually get suckered into seat-of-your pants oil stocks and more often than not, live to regret it.”

I do not wish to tempt fate, but Desire Petroleum is no Cairn Energy. I do hope for Desire's sake that they do strike black gold in meaningful if not bountiful quantities. However, the market response to a whiff of positive news is nothing short of barmy.

[1] The report is available on Moody's web site.

© Gaurav Sharma 2010. Photo: Oil Sands, Canada © Shell, Graphic: Desire Petroleum Share Chart with stated time frame © Digital Look / BBC

Chinese Tightening, Irish Overhang & ITPOES at it!

It has been an interesting five days over which, most notably, analysts at Goldman Sachs opined on Monday that the Chinese government will in all likelihood employ more tightening measures on the economy but their impact on the burgeoning economy’s oil demand for is likely to be “limited.”

The Goldman guys believe a far greater near term risk will come from the “current exceptional strength in diesel demand, which could push Chinese oil demand to new highs in November and December.” Fair dues I say, but not the best of expressions when talking about Ireland.

As further details about its imminent bailout are awaited not many in the City were keen to commit further funds towards crude futures. However, some city types I know were fairly cool about both the fate of the Irish and the connection of the country's troubles with an equities overhang on either side of the pond.

From Goldman analysts, the Irish and the Chinese to the ITPOES who were at it again last week. ITPOES are of course, the (UK) Industry Taskforce on Peak Oil and Energy Security, who warned the British government again last week that a new "peak oil threat" is likely to be felt in the UK within the next five years.

The ITPOES came into being in 2008 led by none other than the inimitable Sir Richard Branson. Their latest report, which is part rhetoric, part fact, is titled Peak Oil Implications of the Gulf of Mexico Oil Spill and was released on Friday (Available here).

Deepwater drilling, they say, is expected to constitute 29 per cent of new global extraction capacity by 2015, up from only 5 per cent. The result is that any future delays or problems associated with deepwater drilling in wake of the BP Gulf of Mexico accident will have much greater impact on supply than is the case today. Wonder whether that implies the end of "cheap oil" rather than the nearing of "peak oil."

© Gaurav Sharma 2010. Photo: Oil Rig, Santa Barbara Channel, USA © Rich Reid / National Geographic

Of Mid-Nov Price Correction, BP & Lukoil

The price of crude has seen a fair bit of fluctuation week over week and I agree with analysts at Société Générale CIB who noted on Tuesday that "the modest short-term crude price correction has been driven by investor profit-taking, as well as an end to a surge in gasoil cracks, which had temporarily supported crude prices."

Prices actually peaked on Wednesday and Thursday of last week. Since then, the front-month crude prices have eased by US$2-3. At 18:05GMT on Tuesday, WTI forward month contract was trading at US$80.65/bbl and ICE Brent at US$83.60/bbl.

Elsewhere in this crude world, it was revealed on Tuesday that BP’s Rhim field off the coast of Scotland has been shutdown as it is understood that the field turned out to be a joint venture between it and financiers related to Iranian oil. The shutdown was triggered because extraction from the field could be in contravention of existing European Union sanctions against Iran, issued in October.

The company it is now seeking clarification from the UK government on how the sanctions would apply. Elsewhere, S&P Ratings Services affirmed its 'BBB-' long-term corporate credit rating and 'ruAA+' Russia national scale rating for Lukoil last week.

Concurrently, S&P also removed the ratings from CreditWatch, where they were placed on July 29, 2010. S&P credit analyst Andrey Nikolaev said, "The affirmation reflects our improved assessment of Lukoil's liquidity position, which we now assess as 'adequate' after the company successfully issued a $1 billion Eurobond."

S&P also anticipates that Lukoil will extend the terms of its committed credit lines over the next several weeks. "We now estimate Lukoil's ratio of sources to uses of liquidity at about 1.2x, factoring in the committed credit lines with the terms to be extended," Nikolaev added in an investment circular.

S&P views Lukoil's business risk profile as "satisfactory", underpinned by large and profitable upstream and downstream operations, which are largely concentrated in Russia. The ratings agency also views Lukoil's financial risk profile as 'intermediate', based on its modest debt leverage and our perception that it has fairly good access to bank funding and capital markets.

© Gaurav Sharma 2010. Photo: Andrew Rig, North Sea © BP Plc