EU’s ‘least worst’ gas supply scenarios & more

The Oilholic spent last Friday evening downing a few drinks with a 'civil servant' of the diplomatic variety who'd returned back from the recently concluded Nuclear Security Summit in The Hague, where the Ukrainian standoff dominated most conversations. But before you get excited, yours truly has no 'Jack Bauer'-level clearance gossip!

However, with 53 nations represented – there were quite a few suits around, and contrary to popular belief, the stiff suits do gossip! Credible intel does appear to suggest that some Europeans did a very fine 'Clinton post-Lewinsky scandal' impression in a geopolitically fresh context which kinda ran like: "We do not have relations with that man Putin." Of course, they were, as Clinton was back in the day, being a little less frugal with the truth.

The Americans already knew that but didn't say so out of diplomatic courtesy, at least not in public. The Oilholic wouldn't have been so courteous, but then yours truly isn't in the diplomatic service. From the Baltics to the Balkans, Russian exports of natural gas dominate the energy spectrum built on hitherto seemingly inextricable relations, whether amicable or not.

Despite promising to diversify their supplies when the Georgian skirmish happened in 2008, not much has changed, as The Oilholic noted earlier this month. As a direct consequence, US sanctions against Russia appear to better structured compared to European ones which look like a rag-bag of measures to accommodate everyone and annoy no one – especially President Putin, who doesn't really care about them in the first place! Most pressing question is – what now for the EU energy equation?

Just as the suits were winding up, Jaroslav Neverovič, Lithuania's energy minister made an impassioned plea to the US to export more gas to Europe as a possible answer. Just as a sub-context, the Baltic States are busy building LNG import terminals. Headline grabbing it may well have been, what Neverovič said, even if realised, would do little to curb European addiction to Russian gas over the medium term.

Supply-side diversity cannot be achieved in an instant, nor can the US solve the problem. If the capacity of all seven US FERC and DOE approved LNG export terminals (so far) is totalled and it is hypothetically (or rather absurdly) assumed that the entire cargo would be dispatched to Europe – the volume would still only replace around 35% of the current level of Russian gas imports to Europe.

But what has changed is that the Baltic nations, as demonstrated by Neverovič, are clearly alarmed; perhaps, more than they were in 2008. The Poles are mighty miffed too and even the Germans are waking up and smelling the coffee. So what's next? American LNG imports will come, while Norway, UK and the Netherlands’ pooled resources could help the trio. 

However, going beyond that, and to quote a brilliant editorial in The Economist, would mean Europeans relying on Algeria, Qatar, Azerbaijan and Kazakhstan which does not seem very savoury. "But the more rogues who sell them gas, the harder it is for any one to hold Europe hostage," it adds! So here's your 'least worst' medium term scenario, preparation for which had to start in 2008 and not in 2014! 

Related to the situation, Fitch Ratings revised the corporate outlooks of nine Russian companies, including those of Gazprom and Lukoil to Negative. As with a situation of this nature there would be losers somewhere and winners elsewhere.

According to the ratings agency, BG, BP, Shell and Total would be among its EMEA rated oil & gas companies that stand to gain from a "potential shift" in EU countries' energy links with Russia over time. On the other hand, Gazprom and Ukraine's Naftogaz – no prizes for guessing – are most likely to find themselves at a competitive disadvantage.

Analysing a scenario where EU countries could be forced to "recast their approach to energy and economic links with Russia over time", as UK Foreign Secretary William Hague has suggested, Fitch said BG, BP,  Shell and Total are well placed.

For instance, BG is participating in three US projects already approved by FERC and DOE to export LNG. BP completed the final investment decision for the Stage 2 development of the Shah Deniz gas field with its local partner State Oil Company of Azerbaijan in December last year. The expansion of the southern corridor gas link to Europe puts these companies in a unique position to diversify EU gas supplies.

Meanwhile, Shell is the first company in the world to develop floating LNG (FLNG) facilities. The technology is an important development for the industry as it reduces both project costs and environmental impact. If Shell is able to replicate the FLNG model it is deploying in Australia to diversify European supplies, it could give the company a competitive advantage over peers.

Finally, Total became the first Western oil major to invest in UK shale prospection after agreeing to take a 40% stake in two licenses that are part of the prospective Bowland Shale in Northern England. The investment could give the company a head start if European shale gas production begins to ramp up in a meaningful way, even though its early days. In fact, its early days in all four cases, and Fitch agreed that supply-side benefits would accrue over time, not overnight.

Going the other way, Gazprom, which supplied around a third of European gas volumes in 2013, faces the prospect of diminishing market share if the EU seeks alternative gas supplies, instead of simply alternative gas routes from Russia around Ukraine. "Europe may finally find the political will to reduce this percentage," Fitch adds.

As for Naftogaz – it's in big trouble alright. Not only could the Ukrainian company face higher prices for gas supplies from Russia accompanied by reduced volumes for internal consumption, the road ahead is anything but certain!

Away from the EU and Ukraine, UK Chancellor of the Exchequer George Osborne dropped a few crude morsels in his annual budget on March 19 to help British consumers and the industry. Fuel duty was frozen again, while passengers on some long-haul flights originating in the UK are set to pay less tax following a revamp of Air Passenger Duty (APD).

Passengers travelling more than 2,000 miles will pay the band B rate, which varies from £67 to £268, Osborne told parliament. The two highest of the four APD tax bands are to be scrapped from 2015, he added. At present, it is cheaper to fly from the UK to the US than the Caribbean, despite often similar distances, a situation Osborne described as "crazy and unjust". So passengers on long-haul flights to destinations such as India and the Caribbean can expect to pay a lower tax rate soon.

Coming on to industry measures, Osborne also put forward a new incentive for onshore prospection, wherein a portion of profit equal to 75% of a company's qualifying onshore capital expenditure will be exempt from supplementary tax charge.

This portion of the profit will then be subject to tax at 30%, while the remaining profit will be subject to a marginal tax rate of 62%, as is usually the case with oil & gas companies operating in the UK. The bold and much needed move went down well in the currently charged geopolitical atmosphere, unless you happen to be opposed to fracking on principle.

Robert Hodges, director of energy tax services at Ernst & Young, said it was welcome news for the shale gas industry which needs to commit significant investment to prove commercial reserves in the UK.

"The Government also announced it will work with industry to ensure that the UK has the right skills and supply chain in place. This is an important commitment, which will be welcomed by industry, to ensure that the UK maximises the benefit from the development of its indigenous oil and gas resources," he added.

As for the North Sea, we saw some moves on ultra high pressure, high temperature (HPHT) fields with Osborne providing an allowance to exempt a portion of a drilling company's profits from the supplementary charge. The amount of profit exempt will equal at least 62.5% of qualifying capex a company incurs on these projects. The Chancellor also said he would launch a review of the tax regime for the entire sector.

Some were pleased, others not so. Maersk Oil and BG, lead operators of the Culzean and Jackdaw fields, are the first to benefit. Both were cock-a-hoop saying it would lead to the direct creation over 700 jobs, with a potential for up to 8,000 more further down the supply chain. However, the International Association of Drilling Contractors (IADC) claims changes over drilling rigs and accommodation vessels would cost firms an estimated £145 million in the coming year. Lobby group Oil & Gas UK also expressed concerns on cost escalation, but welcomed other bits thrown up by Osborne.

Away from it all, there's one tiny non-UK morsel to toss up. According to a recent GlobalData report, it appears that Kenya's first oil & gas licensing round is not expected Q4 2014 at the earliest. The first licensing round was originally scheduled for June last year with an offer of eight blocks up for bidding. Then all went a bit quiet. Now GlobalData says it will happen, but plans have temporarily stalled pending the passage of a new energy bill.

Moving on to the price of the crude stuff, last fortnight was pretty much a case of steady as she goes for Brent, while supply-side issues caused a mini spike with the WTI. And, that can only mean one thing - another narrowing of the Brent-WTI spread to single figures.

Factors in the WTI rear-view mirror included supply shrinkage at Cushing, Oklahoma; down for the eighth successive week last Friday and the lowest in two years, according to the EIA. Libyan, Nigerian supply outages had a bearing on Brent, but it's nothing to write home about this fortnight. Much of the risk is already priced in, especially as Libyan outages are something City traders are getting pretty used to and Nigeria is nothing new. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Oil pipeline © Cairn Energy

The Bosphorus, a 'Wild Project' & Turkish politics

The Oilholic spent better parts of the afternoon in pouring rain examining the strategic maritime artery known to world as the Bosphorus, a strait that forms the boundary between Europe and Asia and splits Istanbul.

For nearly 7 hours, yours truly criss-crossed on ferries from Kabataş on Istanbul's European side to Kadıköy on the Asian side, back to Eminönü on European side [where ancient Byzantium was built] and finally a return journey up and back from Rumelifeneri, Sariyer, passing twice under the Bosphorus and the Fatih Sultan Mehmet bridges.

The said journeys ensured this blogger got a true picture of how busy the world's narrowest natural strait is and it's getting busier with oil and LNG tankers going back and forth from the Black Sea. Excluding local traffic, roughly around 132 ships pass through the Bosphorus on a daily basis, making it the second densest maritime passage after the Strait of Malacca. 

The Oilholic is no naval man, but aboard a vessel on Bosphorus - given the blind bends and S-shaped turns - often one couldn't spot ships approaching from the opposite direction at several points. As if natural and geographical challenges weren't enough, the heavy municipal ferry traffic linking Istanbul's European and Asian sides make navigation even trickier.

The photo (on the right, click to enlarge) is an apt illustration - clicked from a ferry one is aboard, zipping past a Greek tanker, behind which is another ferry, behind which is another tanker in the distance. This is a typical day's navigation for captains of ships passing through here on a murky day like today.

On either side of the Bosphorus live around 14 million souls who call Istanbul home. Makes you think – what if there is a collision? According to Istanbul University, modern navigation techniques have considerably [and thankfully] reduced incidents. Nonetheless, since the end of World War II there have been over 450 incidents on record.

Of the 26 incidents classified as 'major', eight involved tankers and almost all collisions resulted in a crude oil, petroleum or other distillate spill of some description. The worst incident happened nearly 20 years to this day, on March 13, 1994 when a Cyprus registered tanker collided with a bulk carrier resulting in 27 deaths, the spillage of 9,000 tons of petroleum and combustion of another 20,000 tons. The blaze lasted for four days and tanker was completely burnt. Not only was the marine environment harmed, but traffic was suspended for several days.

However long ago the incident may have taken place (and there have been others albeit less serious ones since), it chills people here to this day. Most of the oil shipments originate from Russian ports. Local sources say around 2.5 million barrels per day (bpd) to 3.2 million bpd move through the Turkish straits, which include the Marmara Sea, Çanakkale (or Dardanelles, the separation point of the Gallipoli Peninsula from Asia) and of course the Bosphorus.

The cumulative volume for each year almost singularly depends on how Russian exporters shift their load per annum between Baltic and Black Sea ports. So getting his thinking cap on, Turkish Prime Minister Recep Tayyip Erdoğan, just before seeking re-election for a third term in 2011, announced the 'Kanal İstanbul' project – an idea first mooted in the 16th century.

The PM said that ahead of the 100th anniversary of the Turkish Republic (founded in 1923), the nation needed a "crazy, magnificent" project. The idea is to carve up an artificial canal that would be 50km long, 150m wide and 25m deep. Istanbul itself would turn into two peninsulas and an island courtesy of the artificial re-jigging.

The published measurements carry a message. Any structural engineer would tell you that a canal of the above dimensions would certainly be capable of handling very large crude carriers (VLCCs). This would cut the need for suezmaxes (largest ship measurement capable of transiting through the Suez Canal conventionally capable carrying 1 million barrels) from criss-crossing the Turkish Straits as frequently as they do these days.

It could also help Erdoğan, currently facing local elections and umpteen demonstrations, circumvent the Montreux Convention, which gives Turkey a mandate over the Bosphorus, but allows free passage of civilian ships while restricting passage of naval warships not belonging to Black Sea bordering nations. Critics say the PM is looking to bypass the Montreux Convention, but supporters say he's making a case for good business, while appearing to do his bit for the ecology as well.

Alas a pre-election promise of 2011 and one that's morphed into pre-2014 local elections plan doesn't appear to be properly costed. The figure in the Turkish press is US$10 billion. It's sent all the project financiers this blogger has contacted about it scratching their heads. The headline project valuation is just too low for a project of this magnitude, in fact highly improbable, given the lira's fortunes at the moment.

However, a government official told this blogger that "finance won’t be a problem" while another said "it won’t be needed" as the Turkish Government will self-finance with Phase I already underway. Doubtless, some Russian help – if asked for – would be forthcoming. Ironically, it's a Russian financier, whose kids are [of course] studying in England, who told yours truly, "Erdoğan's project cost estimate is as you British say – a load of bollocks!!"

The PM simply describes the project rather mildly as his "Çılgın Proje" or "Wild Project" and by the looks of things, it certainly is wild. Don't know what the final costs would be, but the target is to have it ready by 2023. As for Russian crude, Ukraine stand-off or not, Baltic or Black Sea routes, it'll ship unabated. Last year, just as Rosneft was eyeing acquisition of TNK-BP, the world largest independent oil trading house Vitol and rival Glencore (now Glencore-Xstrata) agreed to lend $10 billion to the Russian giant to help it finance the acquisition.

In exchange, both the trading houses received a guarantee of future oil supply. A simple Google search would tell you, its not the largest oil trading deals in history, but its right up there dear readers. For Erdoğan, a former mayor of Istanbul, the project would be about his legacy to Turkey, along with a third Bosphorus suspension bridge – Yavuz Sultan Selim Bridge – which is scheduled to open in May 2015.

However, right now under his watch Turkey appears to be in a fight for its soul. Erdoğan's "mildly Islamist" (as The Economist prefers to call it) Adalet ve Kalkınma Partisi or AK Party is hugely popular in rural areas but not quite so in urban centres.

Since arriving on March 8, right up and until this afternoon, as the Oilholic prepares to fly out, there have been repeated protests and clashes in Taksim Square. Even if you are a couple of miles away from the flashpoints, the smell of tear gas is around. It all erupted in May last year with mass protests. The political context is well-documented in the mainstream media as is Erdoğan's tussle with his once mentor cleric Muhammed Fethullah Gülen.

The latest casualty in these god awful political melees was 15-year old Berkin Elvan, who died yesterday following 269 days in a coma after being hit on the head by a tear gas canister last year. He didn't commit a crime say locals; he was just in the wrong place at the wrong time, caught in a skirmish while out to buy bread for his mother.

Erdoğan can build his legacy around urban developments, bridges, canals and superefficient shipping lanes, he can put forward uncosted grandiose dreams, but if lives like Berkin's are the price for his fixation to power, then something is inherently wrong with Turkish politics and the way the PM thinks. On this unusually sad note, that's all from Istanbul folks. Sorry for the temporary digression from what this blog is about, but it's difficult not to feel anything. Keep reading, keep it 'crude'!

Addendum, Mar 15: According to a BBC World service report, as further clashes following the death of Berkin Elvan have spread well beyond Istanbul to 30 other towns, Turkish Prime Minister Recep Tayyip Erdoğan has claimed that the boy had links to "terrorist organisations"…Along with most of Istanbul, the Oilholic despairs!

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© Gaurav Sharma 2014. Photo 1: The Bosphorus Bridge. Photo 2: Traffic in the Bosphorus. Photo 3: Tanker in the Bosphorus. Photo 4: Election fever in Istanbul, Turkey © Gaurav Sharma, March 2014.

Turkey's Russian connection: Bazaars to barrels

The Oilholic finds himself in a soggy Istanbul, with Turkey in the middle of election fever and the Black Sea in the grip of a Cold War style stand-off over Ukraine.

Before landing here, yours truly ran in to a Moody's spokesperson at BA's Heathrow T5 lounge. It seems that the ratings agency predictably sees Gazprom and Russia's banking sector taking a hit, if recent notes to subscribers are anything to go by. With 52% of Gazprom's exports to Europe currently routed through Ukraine and the country contributing up to 8% of its revenues, there is trouble ahead. Nonetheless, it can cope pretty well in the face of an escalation.

When it comes to the banking sector, Moody's reckons the aggregated exposure could be as high as US$30 billion. The Kremlin is likely to step in if needs be but it won't be needed as the figure equates to less than 2% of system assets. Interestingly, just before dashing off to our respective flights, our friend from Moody's gently nudged the Oilholic and quipped, "Wait till you get to Istanbul and see NATO member Turkey's exposure to Russia." And so this blogger came, he saw and he wondered!

We'll come to the barrels later, lets start with the bazaars first. Despite the unusually miserable weather, the city is packed with Russian tourists. From the metro to the tourist spots, you cannot escape Russian chatter in the background. "For sale" signs in retail outlets are up in two languages – Turkish and Russian. In expanding its tourism sector and wider economy, Turkey has welcomed Russian tourists and business investments with open arms including a favourable visa regime for over 10 years now.

The results are tangible. With the Turkish Lira in throes of unpredictability, every big ticket item – from designer stuff and marquee labels to high value Turkish handicrafts – is priced by retailers here in euros; with quite a few Russians around with more than a few euros.

Digressing from retail to banks, the exposure of Turkish banking institutions to Russia is harder to quantify as the current macroclimate in the country [not Ukraine & NATO] has conspired to turn the situation fluid. Unfortunately, no one wants to nail a figure on record as forex permutations are making life difficult extremely difficult for the analysts, but off record it is certainly not "as high as Ukraine."

Excluding exposure of Russian banks to Turkish infrastructure project finance exercises, $5 billion to 10 billion is a reasonable conservative guesstimate. From banks, rather crudely to barrels – Russia is Turkey's 6th largest export market. Mostly consumables, textiles and manufactured goods worth $3 billion were exported by Turkey to Russia in 2012.

What came back from Russian shores was $27 billion worth of imports including crude oil, distillates, natural gas and iron and steel that same year. Of the said figure, $17.26 billion were oil & gas imports! Using a dollar valuation at constant exchange rate (which has been anything but constant), we are looking at a 625% jump in Russian "imports" between 2002 and 2012. The said percentage need not be sensationalised as the starting point was a low base, but it gives you an idea of NATO Turkey's exposure to [and reliance on] Russia.

Furthermore, the Bosphorus is a major maritime artery for oil & gas shipments via the Black Sea. Exports from the Russian loading port of Novorossyisk by tankers via the Turkish straits have been rising steadily over the last 10 years. Recognising this, Turkey even has an embassy in Novorossyisk.

Recently, Poland's Prime Minister Donald Tusk, in sync with the Oilholic, was correctly berating Germany for its exposure to Russian gas and why it would give the EU a weaker hand over the Ukrainian tussle.

"Germany's reliance on Russian gas can effectively limit European sovereignty. I have no doubt," Tusk told reporters, ahead of German Chancellor Angela Merkel’s visit to his country. [Ouch!]

Maybe Tusk ought to look at fellow NATO member Turkey too. If the diplomatic row continues to escalate, Turkey would find it very hard to indulge in verbal or economic jousts with Russia. It took a very vocal stand with Syria, but one suspects it may not be the case this time around. Banks, bazaars and barrels could all feel the squeeze – it's what colleagues in the analyst community down here openly acknowledge.

However, you don't need them or the Oilholic. All you need to do is take the tram from Istanbul's Grand Bazaar through to Kabataş, the last stop on the European shore of the Bosphorus, between Beşiktaş and Karaköy. The journey will help you reach the same conclusions unaided by charts, graphs and economic gobbledegook. And here's hoping, the weather is kinder to you than it has been to the Oilholic. That's all for the moment from Istanbul folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: Eminonu Waterfont, Istanbul, Turkey Photo 2: Greek oil tanker Scorpio passes through the Bosphorus, Turkey. ©  Gaurav Sharma, March 2014.

Crude permutations of the Ukrainian stand-off

When the Russo-Georgian skirmish happened in 2008, European policymakers got a stark reminder of how reliant they were on Russian natural gas. Regardless of the geopolitics of that conflict, many leading voices in the European Union, especially in Germany, vowed to reduce their reliance on Russian gas.

The idea was to prevent one of the world's leading exporters of natural gas from using its resource as a bargaining tool should such an episode occur again. Now that it has, as the Ukrainian crisis brings Russia and West into yet another open confrontation, the Oilholic asks what happened to that vow. Not much given the scheme of things! What's worse, the Fukushima meltdown in Japan and a subsequent haphazard dismissal of the nuclear energy avenue by many European jurisdictions actually increased medium-term reliance on mostly Russian gas.

According to GlobalData, Russian gas exports to Europe grew to a record of 15.6 billion cubic feet per day last year. The US, which is not reliant on Russian natural resources, finds itself in a quandary as EU short-termism will almost certainly result in a toning down of a concerted response by the West against Russia in the shape of economic sanctions.

The human and socioeconomic cost of what's happening in Crimea and wider Ukraine is no laughing matter. However, President Vladimir Putin should be allowed a smirk or two at the idiocy and short-sightedness of the EU bigwigs – reliant on him for natural gas but warning him of repercussions! Therefore, sabre rattling by Brussels is bound to have negligible impact.

Meanwhile, Russia's Gazprom has said it will no longer offer Ukraine discounted gas prices because it is over US$1.5 billion in payment arrears which have been accumulating for over 12 months. Additionally, Rosneft could swoop for a Ukrainian refinery, according to some reports. While economic warfare has already begun, this blogger somehow does not see Russians and Ukrainians shooting at each other; Georgia was different.

Having visited both countries in the past, yours truly sees a deep familial and historic bond between the two nations; sadly that's also what makes the situation queasy. The markets are queasy too. Ukraine was hoping for a shale gas revolution and Crimea – currently in the Kremlin's grip – has its own shale bed. In November 2013, Chevron signed a $10 billion shale gas production sharing agreement with the Ukrainian government to develop the western Olesska field. Shell followed suit with a similar agreement.

Matthew Ingham, lead analyst covering North Sea and Western Europe Upstream at GlobalData, says shale gas production was inching closer. "Together with the UK and Poland, Ukraine could see production within the next three to four years."

However, what will happen from here is anyone's guess. A geopolitical bombshell has been dropped into the conundrum of exploratory and commercial risks.

Away from gas markets, the situation's impact on the wider crude oil market could work in many ways. First off, rather perversely, a mobilisation or an actual armed conflict is price positive for regional oil contracts, but not the wider market. A linear supply shortage dynamic applies here.

An economic tit-for-tat between Russia and the EU, accompanied by a conflict on its borders, would hurt wider economic confidence. So a prolonged escalation would be price negative for the Brent contract as economic activity takes a hit. Russia can withstand a dip in price by as much as $20 per barrel; but worries would surface should the $90-resistance be broken. To put things into perspective, around 85% Russia's oil is sold to EU buyers.

Finally, there is the issue of Ukraine as a major transit point for oil & gas, even though it is not a major producer of either. According to JP Morgan Commodities Research over 70% of Russia's oil & gas flow to Europe passes through Ukrainian territory. In short, all parties would take a hit and the risk premium, could just as well turn into a news sensitive risk discount.

Furthermore, in terms of market sentiment, this blogger notes that 90% of the time all of the risk priced and built into the forward month contract never really materialises. So this then begs the question, whose risk is it anyway? The guy at the end of a pipeline waiting for his crude cargo or the paper trader who actually hasn't ever known what a physical barrel is like!

The situation has also made drawing conclusions from ICE's latest Commitments of Traders report a tad meaningless for this week. Speculative long positions by hedge funds and other money managers that the Brent price will rise (in futures and options combined), outnumbered short positions by 139,921 lots in the week ended February 25, prior to the Ukrainian escalation.

For the record, that is the third weekly gain and the most since October 22. Net-long positions rose by 18,214 contracts, or 15%, from the previous period. ICE also said bearish positions by producers, merchants, processors and users of the North Sea crude outnumbered bullish wagers by 266,017 lots, rising 8.2% from the week before.

Away from Ukraine and on to supply diversity, Norway's Statoil has certainly bought cargo from a land far, far away. According to Reuters, Statoil bought 500,000 barrels of Colombian Vasconia medium crude, offered on the open market in February by Canada's Pacific Rubiales.

When a cargo of Columbian crude is sold by a Canadian company to Norwegian one, you get an idea of the global nature of the crude supply chain. That's if you ever needed reminding. The US remains Pacific Rubiales' largest market, but sources say it is increasing its sales to Europe.

Finally, in the humble opinion of yours truly, Vitol CEO Ian Taylor provided the soundbite of the International Petroleum Week held in London last month.

The boss of the world's largest independent oil trading firm headquartered in serene Geneva opined that Dated Brent ought to broaden its horizons as North Sea production declines. The benchmark, which currently includes Brent, Forties, Oseberg and Ekofisk blend crudes, was becoming "less effective" according to Taylor.

"We are extremely concerned about Brent already not becoming a very efficient or effective benchmark. It’s quite a concern when you see that production profile. Maybe the time has come to really broaden out Dated Brent," he said.

Broadening a benchmark that's used to price over half the world's crude could include Algeria's Saharan Blend, CPC Blend from the Caspian Sea, Nigeria's Bonny Light, Qua Iboe and Forcados crudes and North Sea grades DUC and Troll, the Vitol CEO suggested.

Taylor also said Iran wasn't going to be "solved anytime soon" and would stay just about where it is in terms of exports. The Oilholic couldn't agree more. That's all for the moment folks! Keep reading, keep it 'crude'! 

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© Gaurav Sharma 2014. Photo: Pipelines & gas tank, Russian Federation © Rosneft (TNK-BP archives)

Why Dated Brent is no ‘Libor scandal in waiting’

The Oilholic was asked at a recent industry event whether he thought or had heard any anecdotal evidence about Brent being 'crooked' and susceptible to what we saw with financial benchmarks like Libor. Perhaps much to the annoyance of conspiracy theorists, the answer is no! A probe by the European Commission (EC), which included raids on the London offices of several oil companies and Platts last year, and an ongoing CFTC investigation into trading houses stateside, seems to have triggered the recent wave of questions.

Doubts in the minds of regulators and the public are understandable and very valid, but that an offence on an industry-wide scale can be proved beyond reasonable doubt is another matter. The UK's Office of Fair Trading has already investigated and cleared all parties raided by the EC. Furthermore, it stood by its findings as news of the EC raids surfaced.

As far as price assessment mechanisms go, only Platts' Market on Close (MoC) has faced allegations. It is cooperating with the EC and nothing has emerged so far. Competing methods, for instance ones used by Argus Media, another price reporting agency (PRA), were neither part of the investigation nor have been since.

Let's set all of this aside and start with the basics. A monthly cash-settled future is calculated on the difference between the daily assessment price for Dated Brent (the price assigned on a date when North Sea crude will be loaded onto a tanker) and the ICE daily settlement price for Brent 1st Line Future. Unless loaded as cargo, a North Sea oil barrel – or any barrel for that matter – retains the wider trading metaphor of a paper barrel.

Now as far as the Dated Brent component goes, agreed the PRAs are relying on market sources to give them information about bids, offers and supply-side deals. However, the diversity of sources should mitigate any attempt to manipulate prices by a group of individuals submitting false information. In the case of Libor, the BBA, a single body used to collate the information. In Brent's case, there is more than one PRA. None of these act as some sort of a centralised monopolistic data aggregation body. For what it's worth, anybody with even a minute knowledge of oil & gas markets would know the fierce competition between the two main PRAs.

Don't get the Oilholic wrong – collusion is possible in theory whereby traders gang-up and provide the PRAs with false pre-agreed information to skewer the objectivity of the assessment. However, the supply-side dynamic can wobble on the back of a variety of factors ranging from rig maintenance to an accident, a geopolitical event to actions of other market participants. So how many or how few would be required to fix prices and which PRA would be targeted, when and by how much and so on, and so on!

Then hypothetically let's assume all the price-fixers and factors align, given the size of the market – even if rigging did happen – it'd be localised and cannot be anything on the global scale of fixing that we have seen with the Libor revelations to date. Take it all in, and the allegations look silly at best because the 'collusion dynamic', should there be such a thing, cannot possibly be akin to what went on with Libor.

The EC wants to regulate PRAs via a proposed mandatory code and there is nothing wrong with the idea on the face of it. However, one flaw is that in a global market, buyers and sellers are under no obligation to reveal the price to the PRAs. Many already don't in an ultracompetitive crude world where cents per barrel make a difference depending on the size of the cargo.

If the EC compels traders to reveal information, trading would move elsewhere. Dubai for once would welcome them with open arms and other benchmarks would replace European ones. Anyway, enough said and the last bit is not farfetched! Finally, if fixing on the scale of the Libor scandal is discovered in oil markets and the Oilholic is proved wrong, this blogger would be the first to put his hand up!

Coming on to the current Brent forward month futures price, the last 5-day assessment provided plenty of food for thought. Supply disruptions in Libya (down by 100,000 bpd) and Angola (force majeure by BP potentially impacting 180,000 bpd) kept the contract steady either side of US$109 per barrel level, despite tepid US economic data. That said, stateside the WTI remained stubbornly in three figures on the back of supply side issues at Cushing, Oklahoma. The Oilholic reckons that's the fifth successive week of gains.

Meanwhile, the ICE's latest Commitment of Traders report for the week to February 11 notes that hedge funds and other money managers raised their net long position by 29.6% to 109,223; the highest level since the last week of 2013. The Brent price rose by around $4 a barrel over the stated period. By contrast, the previous week's net long position of 84,276 was the lowest since November 2012.

Away from pricing issues to its impact,  Fitch Ratings said in a recent report that production shortfalls and strategy changes to appease equity holders were a greater threat to the ratings of major Western European oil companies than a prolonged downturn in crude prices.

The ratings agency's stress test of the sector indicated that a Brent price of $55 per barrel would put pressure on credit quality, but compensating movements in cost bases and capex would give most companies a fighting chance at preserving rating levels.

Alex Griffiths, head of natural resources and commodities at Fitch, said, "With equity markets increasingly focussed on returns, bond yields near historical lows and oil prices forecast to soften, the chances of companies increasing leverage to benefit equity holders have risen. The European companies that have reported so far this year have generally resisted this pressure – but it may increase as the year goes on."

Separately, the agency also noted that a fall of the rouble would benefit Russian miners more than oil exporters. For both sectors, the currency's limited decline will strengthen earnings and support their credit profile, but ratings upgrades are unlikely without indications that the currency has settled at a new lower level.

To give the readers some context, the rouble has depreciated by 8% against the US dollar since the first trading day of the year and is down 17% from the end of 2012.

Depreciation of a local currency is generally good news for a country's exporters, but the effect on Russian oil exporters is less pronounced due to taxation and hence is less likely to result in positive rating actions in the future, Fitch said.

From Russia to the US, where there are widespread reports of a flood of public comments arriving at door of the State Department with public consultation on Keystone XL underway in full swing. See here's what yours truly does not get – you can have your comments included in the wider narrative, but are not obliged to give your details even under a confidentiality clause. This begs the question – how do you differentiate the genuine input, both for and against the project, from a bunch of spammers on either side?

Meanwhile, the Department of Energy has approved Sempra Energy's proposal to export LNG to the wider market including export destinations that do not have free trade agreement countries with the US. The company, which has already signed Mitsubishi and Mitsui of Japan and GDF Suez of France, could now spread its net further afield from its proposed export hub in Louisiana.

Elsewhere, Total says its capex budget is $26 billion for 2014, and $24 billion for 2015, down from $28 billion in 2013. No major surprises there, and to quote an analyst at SocGen, the French oil major "is sticking to its guns with more downstream restructuring being a dead certainty."

After accusations of not being too ambitious in its divestment programme, Shell said it could sell-off of its Anasuria, Nelson and Sean platforms in the British sector of the North Sea. The three platforms collectively account for 2% of UK production. Cairn Energy has had a fair few problems of late, but actress Sienna Miller and model Kate Moss weren't among them. That's until they took issue with one of the company's oil rigs blotting the sea off their party resort of Ibiza, Spain, according to this BBC report.

Finally, the pace of reforms and general positivity in the Mexican oil and gas sector is rubbing off on PEMEX. Last week, Moody's placed its Baa1 foreign currency and global local currency ratings on review for an upgrade.

In a note to clients, Tom Coleman, senior vice president at Moody's, wrote: "Mexico's energy reform holds out prospects for the most far ranging changes we have seen to date, benefiting both Mexico's and PEMEX's growth profiles in the medium-to-longer term."

And just before yours truly takes your leave, OPEC says world oil demand will increase by 1.09 million bpd, or 1.2%, to 90.98 million bpd from 89.89 million bpd in 2013. That's an upward revision of 1.05 million bpd in 2014. Non-OPEC supply should more than cover it methinks. 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 1: Oil tankers in English Bay, British Columbia, Canada © Gaurav Sharma, April 2012. Photo 2: Oil exploration site © Lukoil.

Keystone XL revisited, some results & fossil fuels

Despite it having been a mad few days of 'crude' results, the Oilholic feels there is only one place to start this post – the US State Department's recent take on the Keystone XL project.

The Department's review of the project or should you like formalities – its Final Supplemental Environmental Impact Statement – noted that it had "no objections" on any major environmental grounds to the cross-border 1,179 mile-long Alberta to Texas pipeline extension project.

Its take, of course, pertains to 875 miles of proposed pipeline construction across US jurisdictional control which has been the subject of immense controversy with everyone from the American workers' unions [flagging-up job creation] to environmentalists [warning about risk of spillage] weighing in.

So is the end of the saga close with a thumbs-up from the State Department? Sadly, not quite, not yet! A 30-day public comment period has begun and is scheduled to end on March 7. During this time, "members of the public and other interested parties" are encouraged to submit comments on "the national interest determination."

Then the ultimate decision has to be made by the ditherer-in-chief, President Barack Obama, who is yet to make his mind up, pending reviews from "other government agencies" and the public at large.

As expected, the State Department's statement is full of waffle. Hoping not to annoy either those for or against the project, it took no firm stances in the Oilholic's opinion. However, there is one very clear, in fact explicit, conclusion by the department, from this blogger's reading of it – Alberta's oil sands will be developed Keystone XL or not!

In a related development impact assessment, it also noted – perhaps in no small part down to recent incidents and accidents – that using the rail network to transport crude was an even worse option than the pipeline itself, if a carbon footprint was the deciding factor. The so-called "other agencies", most notably the Environmental Protection Agency, now have around 90 days to comment before the State Department finally issues its "final" recommendation to the President.

Then there would be no excuses or reasons for stalling left and we should know either ways by the summer. One thing is for sure, the Americans have formally acknowledged that cancelling the pipeline extension won't stop E&P activity in the oil sands. So if that's what the environmentalists are after, there's some food for thought. One wishes, the State Department read this blog more often. Yours truly could have saved them a lot of time and money in reaching such a blatantly obvious conclusion.

For TransCanada's sake, which first applied for a permit from the US government as far back as 2008, the Oilholic hopes the US$7 billion project does go ahead. Stepping away from pipeline politics, to some 'crude' financial results over the past week, one cannot but feel for BG Group's Chief Executive Chris Finlayson.

In a geopolitically sensitive industry, Finlayson's team could not be apportioned blame when he announced that group earnings would dip by 33% on an annualised basis to around $2.2 billion, owing to unrest in Egypt. In the backdrop of domestic strife, the Egyptian government has not honoured agreements covering BG Group's share of gas from fields in the country, with high levels of gas being diverted to the domestic market.

Unable to fulfil its export obligations, the company had to serve force majeure notices to affected buyers and lenders, in effect releasing all sides from contractual obligations for circumstances beyond their control. Hence, a company deemed to be high-flier in the oil & gas world was - albeit temporarily - made to look like a low-flapper boosted by occasional gusts of gas...er sorry wind!

As Egypt accounts for over 20% of its annual production at present – BG Group's profit warning made its shares take a plastering following the trading update on January 27, dipping 18% at one point. The price is currently in the £10 to £11 range and most analysts are nonplussed. For instance, Liberum Capital cut BG Group to hold from buy, with the target cut from £14.75 to £12.80. Investec analyst Neill Morton cut the group's EPS forecast for 2014 and 2015 by 22% and 16% respectively.

"However, we do not believe that a takeover is likely (or even possible?) for a $60 billion company which is likely to command a substantial takeover premium. The key challenges over the next 18 months are the developments in Brazil and Australia which still run the risk of further issues, in our view (for e.g. the Brazil development is being done by Petrobras)," Morton added.

While BG Group was warning on profits, supermajor Shell wasn't exactly covering itself in glory. Following on from a pretty substantial profits warning, Shell's profits [outstripping the effect of oil price fluctuations came] in at $2.9 billion for the last quarter of 2013, down from $5.6 billion noted over the same period in 2012. The market was already well prepared for a dip in performance from Shell, but much to this blogger's surprise, new chief executive Ben van Beurden said the company's strategy presentation [slated for March 13] would contain no fresh targets on production, capex and asset disposal.

Odd indeed, and if one might humbly add – Shell's asset disposal, especially if similar drives at BP, Chevron and ConocoPhillips are to be used as measuring rods, seems a bit random! The Anglo-Dutch company said it was targeting disposals of $15 billion in the current financial year, and had stopped exploration in Alaska.

Its stake in the Australian Wheatstone project is expected to go, and a 23% stake in the Brazilian Parque das Conchas (BC-10) offshore project already has gone, subject to regulatory approvals. Ratings agency Fitch said such moves were positive, but added: "It remains to be seen whether Shell will take the opportunity that this flexibility affords it to retrench, or be tempted into shareholder friendly actions that could threaten its 'AA' credit rating."

Finally, ExxonMobil – biggest of the publicly traded IOCs by market value – also saw its profits below market expectations after a failure to offset declining production with fresh reserves. For the fourth quarter, it posted a net income of $8.35 billion, or $1.91 per share, compared with $9.95 billion, or $2.20 per share, over the same quarter in 2012. Those picky analysts were hoping for $1.92 to $1.94 per share – some will never be pleased!

Forget the analysts, here's an interesting article on what Warren Buffet sees in ExxonMobil to help draw conclusions on the "quintessential defensive stock." In response to his company's latest financials, chief executive Rex Tillerson promised to move ahead with new exploration projects.

Away from results, oil majors and minors ought to take notice as it seems oil might be overtaken by coal as the dominant primary energy source worldwide by 2017, according to the IEA. Adding further weight to this hypothesis, Worldwatch Institute's recent Vital Signs Online study noted that natural gas increased its share of energy consumption from 23.8% to 23.9% during 2012, coal rose from 29.7% to 29.9%, while oil fell from 33.4% to 33.1%.

Coal, natural gas, and oil, collectively accounted for 87% of global primary energy consumption in 2012. Finally, OPEC's 'long-standing' Secretary General Abdalla Salem El-Badri has said its member nations will be able to handle the extra oil "expected to come from Iran, Iraq and Libya" to head off any oversupply.

We believe you sir, but it'll be kinda hard to keep a trio gagging for an export impetus to toe the line, say us supply-side analysts. Hopefully, oversupply or even the perception of oversupply should bring the price of the crude stuff down a fraction and may be price positive for consumers. Hence, a month into 2014, yours truly stands by his price forecast. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: The White House, Washington DC, USA © Gaurav Sharma, April 2008. Photo 2: Shell tanker truck at Muscat International Airport, Oman © Gaurav Sharma, August 2013.

Notes on a scandal from an ex-Enron pragmatist

When the Enron scandal broke and that icon of corporate America filed for bankruptcy on December 1, 2001, the Oilholic was as stumped by the pace of events as those directly impacted by it. In the months and years that were to follow, bankruptcy proceedings for what was once 'America's Most Innovative Company' according to Fortune, turned out to be the most complex in US history.

It soon emerged that one of Enron's own – Dr Vincent Kaminski – a risk management expert especially headhunted in 1990s from Salomon Brothers and appointed Managing Director for Research, had repeatedly red flagged practices within the energy company's corridors of corporate power.

Alas, in a remarkably stupendous act, Kaminski and his team of 50 analysts, while specifically hired to red flag were often ignored when and where it mattered. Cited cautions ranged from advising against the use of creative accounting, "terminally stupid" structuring of Enron's special purpose vehicles (SPVs) to conceal debt by then CFO Andrew Fastow, and the ultimately disastrous policy of securing Enron's debt against stock in the corporation itself.

What transpired has been the subject of several books – some good (especially Elkind & McLean's), some bad and some opportunistic with little insight despite grandiose pretensions to the contrary. Having lapped all of these up, and covered the scandal in a journalistic capacity, the Oilholic had long wanted to meet the former risk manager of Enron.

At last, a chance encounter in 2012, followed by a visit to Houston last November, finally made it possible. These days Kaminski is an academic at Rice University and has written no less than three books; the latest one being on energy markets. Yet, not a single one on the Enron fiasco, one might inquire, for a man so close to it all?

At peace and reasonably mellow in the Houston suburb of The Woodlands, which he calls home, the former Enron executive says, even though it rankles, the whole episode was "in the past", and despite what was said in the popular press – neither was he the only one warning about impending trouble ahead nor could he have altered Enron's course on his own.

"A single person cannot stop a tanker and I wasn't the only insider who warned that there were problems on the horizon. Looking back, I always approached every problem at Enron in good faith, gave the best answers I could come up with on risk scenarios, based on the information I had and my interpretation of it, even if bosses did not like it.

"If honesty was deemed too candid or crude then so be it! Whatever I did at Enron, the red flags I raised, was what I was paid for. Nothing less could have been expected of me; I saw it as my fiduciary duty."

He agrees that Enron's collapse was a huge blow to Houston's economy and overall wellbeing at the time. "There was a chain reaction that affected other parts of the regional economy. In fact, energy trading and marketing itself went through a crisis which lasted a few years."

To this day, Kaminski says he has no way of knowing whether justice was done or not and isn't alone in thinking that. "By the time of the final winding-up process, Enron had about 3,000 entities created all over the world. It was an extremely complex company."

But does the current generation of Rice University students ask him about Enron? "Right now, I am teaching a different generation. Most of my students are typically 25 to 30 years old. When the Enron scandal unfolded [over a decade ago] they were teenagers. A lot has happened in the corporate world since then, which they have had to take in as they've matured. The financial tsunami that was the global financial crisis, and what emerged in its wake, dwarfed what happened at Enron. For them, Enron is but a footnote in corporate history."

"That scandal devastated public trust in one brand, however big it may have been at the time. But the global financial crisis eroded public trust in an entire sector – investment banking. Perhaps as a result, Enron's collapse has ceased to generate as much interest these days. That's a pity! Depending on one's point of view, the extent of the use [or misuse] of SPVs and the number that was discovered at collapsing financial institutions in 2007-09, was several times over what was eventually catalogued at Enron."

Hence, the ex-Enron executive turned academic doubts whether the world really learnt from the scandal. "Enron was a warning from history, from the energy business to other sectors. I describe my former employer as a canary in a coal mine demonstrating the dangers of excessive leverage, of having a non-transparent accounting system and all those sliced and diced SPVs."

"Pre-crisis, the financial sector was guilty of formally removing 'potentially' bad assets from the parent company to SPVs. However, in real financial terms that wasn't the case. When things took a turn for the worse, all the assets and liabilities put on to SPVs came back to be reabsorbed into the balance sheets."

Formally they were separate and 'special', Kaminski notes, but for all practical reasons there was no effective transfer of risk.

"Rewind the clock back and there was no effective transfer of risk in the case of Enron either when its horror story of SPVs and creative accounting came out in all its unsavoury detail. So if lessons were learnt, where is the evidence? Now, let's forget scruples for a moment and simply take it as a basic mistake. Even so, there is no evidence lessons were learned from the Enron fiasco."

He adds that those who don't have an open mind will never learn. "This is not exclusive to the energy business or financial services. It's perhaps true of everything in life. Arrogance and greed also play a part, especially in the minds of those who think they can somehow extricate themselves when the tide turns."

As early as 2004-05, the Rice University academic says he was debating with colleagues that a financial crisis could be on the horizon as the US property market bubbled up.

"Some people branded me as crazy, some called me pessimistic. They said the world is mature enough to manage the situation and progress in economic and financial sciences had created tools for effective management of market and credit risks. Some even agreed that we'll have a train wreck of a global economy, but to my amazement remarked that they knew how to "get out in time."

Kaminski says while it can be true of individuals who can perhaps get out in time, it cannot be true of large corporations and the entire financial system. "They would invariably take a hit, which in some cases – as the financial crisis showed – was a fatal hit. Furthermore, the financial system itself was scarred on a global scale."

Over the years, this blogger has often heard Kaminski compare chief risk officers (CROs) to food tasters in medieval royal courts.

"Indeed, being a risk manager is a job with limited upside. You cannot slow 'acting poison' and the cooks don’t like you as you always complain that the food tastes funny. So if they catch you in a dark place, they will rough you up!" he laughs.

"I have said time and again that risk managers should be truly independent. In a recent column for Energy Risk, I gave the example of the CRO at Lehman Brothers, who was asked to leave the room when senior executives were talking business. It is both weird and outrageous in equal measure that a CRO would be treated in this way. I would resign on the spot if this happened to me as a matter of principle."

He also thinks CROs should be reporting directly to the board rather than the CEO because they need true independence. "Furthermore, the board should not have excessive or blind confidence in any C-suite executive just because the media has given him or her rock-star status."

A switch from the corporate world to academia has certainly not diminished Kaminski’s sense of humour and knack for being candid.

"Maybe having your CEO on the cover of Business Week [Cue: Enron's then CEO Jeff Skilling] could be the first warning sign of trouble! The second signal could be a new shining tower [see above left - what was once Enron’s is now occupied by a firm Skilling called a 'dinosaur' or legacy oil company – Chevron] and the third could be your company's name on a stadium! Our local baseball team – Houston Astros – called a stadium that was 'Enron Field' their home, then 'Enron Failed'. Thankfully, it's now shaken it off and is simply Minute Maid Park [a drinks brand from Coca-Cola's portfolio]."

"But jokes apart, excessive reliance or confidence in any single individual should be a red flag. I feel it's prudent to mention that I am not suggesting companies should not reward success, that's different. What I am saying is that the future of a company should not rely on one single individual."

Switching to 'crude' matters, Kaminski says trading remains an expensive thing for energy companies and is likely to get even costlier in light of higher capital requirements for registering as a swap dealer and added compliance costs. "So the industry will go through a slowdown and witness consolidation as we are already seeing."

On a more macro footing, he agrees that the assetization of black gold will continue as investors seek diversity in uncertain times. As for the US shale bonanza versus the natural gas exports paradigm, should exports materialise in incremental volumes, the [domestic] price of natural gas will eventually have to go up stateside, he adds.

"Right now, the price [of US natural gas] is low because it is abundant. However, to a large extent that abundance is down to it being cross-subsidised by the oil industry [and natural gas liquids]. I believe in one economic law – nothing can go on forever.

"As far as the LNG business is concerned, it will still be a reasonably good business, but not with the level of profitability that most people expect, once you add the cost of liquefaction, transportation, etc."

The Oilholic and the ex-Enron pragmatist also agreed that there will be a lot of additional capacity coming onstream beyond American shores. "We could be looking at the price of natural gas in the US going up and global LNG prices going down. There will still be a decent profit margin but it's not going to be fantastic," he concludes.

And that's your lot for the moment! It was an absolute pleasure speaking to Dr Kaminski! Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo 1: Dr Vincent Kaminski at El Paso Trading Room, Rice University, Houston. Photo 2: Chevron Houston, formerly the Enron Towers. Photo 3: Dr Kaminski & the Oilholic, in The Woodlands, Texas, USA © Gaurav Sharma, November 22, 2013.

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'!

To follow The Oilholic on Twitter click here.

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.