Of IEA, OPEC and the Hoo-Hah over BP & Rosneft

Both the IEA and OPEC are now more upbeat about the global economic recovery over 2011, which could mean only one thing – an upward revision of global crude oil demand. Starting with the IEA, the agency says it now expects global crude demand to rise by 1.4 million barrels a day in year over year terms over 2011 to 89.1 million barrels per day; a revision of 360,000 barrels per day compared to its last forecast.

OPEC also revised its global oil demand forecast putting demand growth at 1.2 million barrels a day for the year; an upward revision of 50,000 barrels per day from its last estimate. In its monthly report, the cartel also noted that demand for its own crude is expected to average 29.4 million barrels of oil per day in 2011; an upward revision of 200,000 barrels over the previous forecast.

Both OPEC and IEA expect the increase in crude oil demand to be driven entirely by emerging markets, while OECD demand is projected to reverse to its "underlying, structural decline in 2011," according to the latter. Their respective response to the forecasts is one of understandable contrasts.

Nobuo Tanaka, head of the IEA, said a subsequent "alarming" rise in the oil price would be damaging. "We are concerned about the speed of the rising oil price, which can harm the growth of economies. If the current price continues, it will have a negative impact," he added. However, OPEC remains unmoved, as the forward month futures spread between Brent and WTI crude continues to widen to US$5-plus in favour of the latter. Both benchmarks lurk close to the US$100-mark.

OPEC’s position unsurprisingly is that the market remains well supplied. Cartel members UAE, Iran, Venezuela and Algeria say they are not concerned about a US$100 per barrel price. In fact, Venezuela's Energy Minister, Rafael Ramirez, described the price of $100 as "fair value" while speaking to the Reuters news agency. There are no prizes for guessing that an emergency meeting of the cartel to raise production is highly unlikely!

Now to the BP-Rosneft tie-up which sent the markets into a tizzy. In a nutshell, news of BP’s acquisition of a 9.5% stake in Rosneft which in turn would bag a 5% stake in BP was good, but it did not quite merit the response it got. Markets cheered it; environmentalists jeered it (given the open invitation to dig in the Arctic).

Rest of the narrative is a bit barmy. First of all, agreed it is a solid deal but given the involvement of a company 75% owned by the Russian government – I am unsure how it would be instrumental or for that matter detrimental to the UK’s petroleum security. Surely, the jury should still be out on that one. Secondly, this in no way implies that BP has turned its back on the US market in light of recent events as some market commentators have opined.

Finally, it is more of a marriage of convenience rather than a historic deal. Rosneft needed technical expertise and does not care much for political rhetoric in western markets about digging deeper and deeper for crude. BP needs access to resources. Both parties should be happy and it is rumoured in the Russian press that TNK-BP would also like a slice of the potentially lucrative Arctic ice cake. Away from the main event, the sideshow was just as engaging.

Curiously city sources revealed that BP did not use its preferred broker JPMorgan Cazenove, but rather opted to go with London-based Lambert Energy Advisory. It did amuse some in the City. All I can say is good luck to Philip Lambert. Finally, talking of the little guys in this crude world – have you heard of AIM-listed Matra Petroleum?

Last I checked, this independent upstart expects to be producing a rather modest 600-700 barrels per day by H1 2011 and its share price is around 3.52p. So assuming, Brent caps US$100-plus by end of H1 2011 and Matra delivers – the share price could treble in theory. I am not making a recommendation – let’s call it an observation!

© Gaurav Sharma 2011. Photo © Adrian R. Gableson

Crude Year 2011 Begins With a Bang

I must say the New Year has commenced with a flurry of crude news. Traders and oil men had barely resumed work for the first trading day of 2011 that the IEA declared rising oil prices to be a risk to economic recovery. In a publication on Jan 5th, the agency said oil import costs for OECD countries had risen 30% in the past year to US$790 billion which is equal to a loss of income of 0.5% of OECD gross domestic product (GDP).

Speaking to the BBC’s world service, IEA’s Fatih Birol said, "There is definitely a risk of major negative implications for the global economy." I agree and accept this, but truth be told we are some way away from a US$150-plus per barrel high. This morning though, the Brent forward month futures contract was flirting with the US$100 mark. The cold weather we have had either side of the pond does generally tend to support crude prices.

Analysts at SocGen believe the Alaska pipeline shutdown, following a leak, provided only limited support to WTI. Last weekend, a minor leak was discovered at Pump Station 1 on the Trans-Alaska Pipeline System (TAPS) causing a shutdown on the pipeline and prompting Alaska North Slope (ANS) production to be cut from 630,000 bpd to just 37,000 bpd. The pipeline, which carries almost 12% of US crude output, should be restarted "soon", according to its operator Alyeska which is 47% owned by BP, while ConocoPhillips and ExxonMobile have 28% and 20% stakes respectively.

Continuing with forecasts, a new report from ratings agency Moody’s notes that oil prices should stay "moderately high" in 2011, boosting energy companies that produce crude and natural gas liquids, but weak natural gas prices will continue to dog the energy sector this year. More importantly, rather than the volatility of recent years, Moody's expects a continuation of many of the business conditions seen in 2010, despite the Macondo incident.

Steven Wood, managing director of Moody's Oil and Gas/Chemicals group believes that certain business conditions will tighten during the year, and pressures could emerge beyond the near term. Moody's price assumptions – which are not forecasts, but guidelines that the agency uses in its evaluations of credit conditions – call for moderately high crude prices of US$80 per barrel for 2011, along with natural gas prices of US$4.50 per million Btus.

Elsewhere, a US government commission opined in a report that 'bad management' led to BP disaster. Across the pond in London, a parliamentary committee of British MPs raised "serious doubts" about the UK's ability to combat offshore oil spills from deep sea rigs. However, they stopped short of a calling for a moratorium on deep sea drilling noting that it would undermine British energy security.

© Gaurav Sharma 2011. Photo: Veneco Oil Platform, California © Rich Reid / National Geographic

Final Notes of Crude Year 2010

Recapping the last fortnight, I noted some pretty interesting market chatter in the run-up to the end of the year. Crude talk cannot be complete without a discussion on the economic recovery and market conjecture is that it remains on track.

In its latest quarterly Global Economic Outlook (GEO) Dec. edition, Fitch Ratings recently noted that despite significant financial market volatility, the global economic recovery is proceeding in line with its expectations, largely due to accommodative policy support in developed markets and continued emerging-market dynamism.

In the GEO, Fitch has marginally revised up its projections for world growth to 3.4% for 2010 (from 3.2%), 3.0% for 2011 (from 2.9%), and 3.3% for 2012 (from 3.0%) compared to the October edition of the GEO. Emerging markets continue to outperform expectations and Fitch has raised its 2010 forecasts for China, Brazil, and India due to still buoyant economic growth. However, the agency has revised down its Russian forecast as the pace of recovery proved weak, partly as a result of the severe drought and heatwave in the summer.

Fitch forecasts growth of 8.4% for these four countries (the BRICs) in 2010, and 7.4% for each of 2011 and 2012. While there are ancillary factors, there is ample evidence that crude prices are responding to positive chatter. Before uncorking something alcoholic to usher in the New Year, the oilholic noted that either side of the pond, the forward month crude futures contract capped US$90 per barrel for the first time in two years. Even the OPEC basket was US$90-plus.

Most analysts expect Brent to end 2012 at around US$105-110 a barrel and some are predicting higher prices. The city clearly feels a US$15-20 appreciation from end-2010 prices is not unrealistic.

Moving away from prices, in a report published on December 15th, Moody's changed its Oilfield Services Outlook to positive from stable reflecting higher earnings expectations for most oilfield services and land drilling companies in 2011.

However, the report also notes that the oilfield services sector remains exposed to significant declines in oil and natural gas prices, as well as heightened US regulatory scrutiny of hydraulic fracturing and onshore drilling activity, which could push costs higher and limit the pace and scale of E&P capital investment.

Peter Speer, the agency’s Senior Credit Officer, makes a noteworthy comment. He opines that although natural gas drilling is likely to decline moderately in 2011, many E&Ps will probably keep drilling despite the weak economics to retain their leases or avoid steep production declines. Any declines in gas-directed drilling are likely to be offset by oil drilling, leading to a higher US rig count in 2011.

However, Speer notes that offshore drillers and related logistics service providers pose a notable exception to these positive trends. "We expect many of these companies to experience further earnings declines in 2011, as the U.S. develops new regulatory requirements and permitting processes following the Macondo accident in April 2010, and as activity slowly increases in this large offshore market," he concludes.

Couldn’t possibly have ended the last post for the year without mentioning Macondo; BP’s asset sale by total valuation in the aftermath of the incident has risen to US$20 billion plus and rising. Sadly, Macondo will be the defining image of crude year 2010.

© Gaurav Sharma 2010. Photo: Oil Rig © Cairn Energy Plc

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