‘Cash-all-gone’ project and [Too Much] Oil and [Less] Money Conference

After billions of dollars being spent, delays and pipeline leaks, Kazakhstan's offshore Caspian Sea located Kashagan oilfield – often dubbed ‘cash-all-gone’ by the wider energy industry – is back onstream with its first cargo having been dispatched and a gradual uptick in production to 370,000 barrels per day (bpd) expected by the fourth quarter of 2017.

Discovered at the turn of the millennium, the much maligned Kashagan has cost at least $50 billion so far. A report by CNN Money back in 2012 claimed a staggering $116 billion had been spent, something that those involved hotly contest. Deemed the main source of supply for the Kazakhstan-China Oil pipeline, the field also has a $5 billion stake in it owned by China.

While its good news all around, the only issue is that one of the most expensive offshore oil projects in the world is coming onstream at a time when the oil price is lurking around $50 per barrel and the market is wishing there were fewer barrels of the crude stuff rather than more.

With all gathering and processing infrastructure in place for a 2013 start, including 20 pre-drilled production wells, Kashagan could have captured the upside of record high oil prices if had production continued as planned back then, say the good folks at research and consulting outfit GlobalData. However, a pipeline leak scuppered it all back then and triggered another protracted delay.

Anna Belova, GlobalData’s Senior Oil & Gas Analyst, says,"Instead, the project has restarted in today's oversupplied market, and while the oil price has rebounded, the current levels would not justify Kashagan's full cycle capital expenditure (capex), which exceeds $47 billion to date."

One thing is all but guaranteed; more oil barrels are on their way to the global supply pool. Belova adds: "Current processing capacity for Kashagan’s Phase 1 with all three lines online targets 370,000 bpd, potentially increasing to 450,000 bpd but under the 495,000 bpd capacity.

"With a large number of pre-drilled wells and a multi-stage processing build-up, Kashagan is well positioned to reach its targeted capacity for Phase 1 by 2018. This paves the way for negotiations on full-field development that has a potential bring over 1.1 million bpd to global crude markets."

Wonder if someone has sent the projections to Russia and OPEC? For a real-terms cut of say 1.5 million bpd – should there by one from the first quarter of 2017 onward coordinated by Riyadh and Moscow – would be more or less made up by Kashagan alone within 12 months, forget other non-OPEC producers. What's more, much of it would be going straight via pipeline to China, currently the world's largest importer of crude.

As for the oil price, despite net-shorts being at their lowest in weeks, if US Commodity Futures Trading Commission (CFTC) data is anything to go by, we are still stuck pretty much either side of $50 per barrel. Here's the Oilholic’s latest take in a Forbes post.

Meanwhile, a veritable who’s-who of oil and gas industry arrived in London last week for the Oil and Money Conference 2016, an industry jamboree that could well have been renamed – "Too Much Oil and Less Money" Conference for its latest installment. Beyond the soundbites and customary  schmoozing, this year's Petroleum Executive of the Year was Khalid Al-Falih, who has been in his job as Saudi Energy Minister for a really long five months, but the accolade one suspects was for his role as Chairman of Saudi Aramco.

However, the good thing about these annual industry shindigs is that you get to meet old friends, among whom the Oilholic counts Deborah Byers, EY’s Oil & Gas Leader and Managing Partner of its Houston Practice as one.

While EY is not in the business of price forecasting, Byers suggests the industry is adjusting to a new normal in the $40-60 per barrel range, one that would be hard to shake-off over the short-term barring a high magnitude geopolitical event.

“Even if OPEC cuts production in November, I believe market rebalancing in its wake would only last for a little while, with non-OPEC production also benefitting from any decision taken in Vienna.”

The pragmatic EY expert also doesn’t buy the argument made in certain quarters that the US either is or could be a swing producer. "In a classic sense, Saudi Arabia is the only global swing producer – it has significant reserves, the tapping of which it can turn up or down at will. You cannot replicate that scenario in non-OPEC markets, including the US. What the American shale sector can do is put a ceiling on the oil price and keep the market in check."

Away from oil prices, one final snippet before the Oilholic takes your leave; Moody's has upgraded all ratings of the beleaguered Petrobras, including the company's senior unsecured debt and corporate family rating (CFR), to B2 from B3, given "lower liquidity risk and prospects of better operating performance" in the medium term.

In a move following the close of markets on Friday, the ratings agency said that Petrobas' liquidity risk has declined over the last few months on the back of $9.1 billion in asset sales so far in 2016 and around $10 billion in exchanged notes during the third quarter, which extended the company's debt maturity profile

However, Moody’s cautioned that plenty still needs to be resolved. For instance, sidestepping existing financial woes, low oil prices, a class action lawsuit, the US Securities Exchange Commission (SEC)'s civil investigation and the US Department of Justice (DoJ)'s criminal investigation related to bribery and corruption will negatively affect the company's cash position. Afterall, ascertaining the settlement amount remains unclear, and won't be known for some time yet. That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Abandoned petrol station in Preston, Connecticut, USA ©

Todd Gipstein/National Geographic.

OPEC’s cut is not an oil market panacea

Manic few weeks of travel and speaking engagements meant the Oilholic could not pen his thoughts on the Saudi-Russian agreement over the need to lower oil production, and other OPEC shenanigans sooner. 

Plus the last fortnight has given much food for thought news-wise, with the oil price registering a noticeable uptick (see chart left, click to enlarge).

Forget, the world’s two leading producers, it appears all of unruly OPEC is onboard for a production cut too, going by recent soundbites. But is it? Really?

For starters, while the market has been told there is consensus among the cartel's members about the need to cut oil production; details on how OPEC would go about it would only be provided on 30 November, after the conclusion of it’s next ordinary meeting. 

It implies that until December, everyone within OPEC can keep pumping regardless, ahead of its pledge to limit “production to a range of 32.5m to 33m barrels per day (bpd).” Seeing is believing, as the old saying goes.

Secondly, how is OPEC going to enforce the quota? That's something it has been particularly poor at going by recent form. The market has not been given individual members’ quotas since 2008, and OPEC's latest monthly report acknowledges the prospect of rising production from Libya and Nigeria. 

So assuming Libya, Nigeria, Iraq and Iran would not partake in either cutting or freezing production – will it be left to Gulf oil exporters, led by the Saudis, to cut production? The Oilholic finds that very difficult to believe, but stranger things have happened. 

Thirdly, will the latest attempt succeed and are the Russians really in agreement this time around? That is anybody’s guess, but if it fails – OPEC and Russia will have a serious credibility problem for the future, as it would be the third attempt at capping crude production this year alone to falter. 

For all intents and purposes, it appears both OPEC and Russia are aiming for a $60 per barrel oil price. If that is their aspiration, it would suit North American players just fine, whose pain threshold - in the Oilholic's opinion - happens to be around $30 per barrel. 

Anyway you look at it, non-OPEC production will rise. So such short-term overtures, should they materialise, are bound to reap only short-term rewards. That's all for the moment folks! Keep reading, keep it 'crude'!

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On the Firth of Forth with an ethane tanker

As a mad month of travelling nears its end, the Oilholic was up earlier today in the small hours of the morning sailing on the Firth of Forth, Scotland, observing Panamax tankers load up Forties crude from the North Sea at the Hound Point Terminal at sunrise (see left). 

If you are lucky enough to catch the morning din with the weather holding up, it is quite a sight. However, the main purpose of being anchored in the middle of the Firth of Forth so early was not to see Panamax tankers fill-up, but rather to take a peek at the Ineos Insight; a ship carrying ethane sourced from the Marcellus shale stateside to British waters. Lo and behold she surfaced soon enough too (see below right).

This first consignment of US shale gas to the UK has given yours truly plenty of talking points for better parts of a fortnight. So here’s a take on its geopolitical significance for IBTimes UK, and a chat with Ineos director Tom Pickering. And well here is a spot report of the day’s event too, bagpipes, boat rides, canapes and all. 

However, if the back story is your thing, here it is as described for Forbes, and a more holistic account on this blog. 

With plenty of column inches dedicated to the event by yours truly to it, there’s little more to be done other than to pass on the links above to you and enjoy a view of oil and gas industry history in the making. That’s all from Scotland folks! It’s on to Edinburgh and then back to London. Keep reading, keep it crude!

Update 29/10/16: Furthermore, since this historic shale consignment arrived in Scotland, which has a moratorium on shale exploration, here is the Oilholic's IBTimes UK column touching on the hypocrisy of the Scottish Government’s stance on shale.

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© Gaurav Sharma 2016. Photo 1: Sunrise at Hound Point Terminal, Firth of Forth, Scotland, UK. Photo 2: Ineos Insight arrives in British Waters © Gaurav Sharma, September 2016 

Fujairah’s new VLCC jetty, oil benchmarks & more

The Oilholic finds himself roughly 3,500 miles south east of London, in Fujairah, United Arab Emirates, for a speaking engagement at the Gulf Intelligence Energy Markets Forum 2016. 

However, before proceedings began at the event, the Emirate’s administration took the occasion to launch its first Very Large Crude Carrier (VLCC) jetty, built at a cost of AED 650 million (£137m, $177m), with the construction of a second jetty already underway. In sync with the launch, VLCC Kelly, part of the Abu Dhabi National Oil Company fleet, moored at the jetty (see above left).

The move, a part of Fujairah’s drive to catch-up with Singapore as a major oil storage hub on the so-called South-South energy shipping corridor, was accompanied by global price aggregator Platts announcing it would publish independent, outright price assessments for a range of oil products for the Middle East market on a FOB [Free-On-Board] Fujairah basis starting on 3 October, 2016.

The Port, for its part, will also publish weekly inventory data to improve transparency. With the likes of Vitol and Gulf Petrochem bolstering their presence in Fujairah, private tank storage capacity is tipped to exceed 14 million cubic metres by 2020, from an expected 9 million cubic metres by the end of 2016. That’s definitely something to mull over in terms of the global oil storage stakes, considering the fact that less than two decades ago all people saw when it came to Fujairah was a bunkering hub.

The events preceding provided the perfect setting and plenty of talking points for the EMF itself, which is growing bigger with each passing year; a testament to the Gulf Intelligence team. Yours truly, moderated two panels on key subjects – including the crucial need for Middle Eastern benchmarks and strategies for securing oil and gas sector finance amid oversupply.

Of course in the current climate, market discourse would not be complete without touching on the direction of the oil price. Readers of this blog are familiar with the Oilholic’s belief that the oil price is likely to be stuck in the $40-50 per barrel range, and would be no higher than that come the end of the year.

Given the current set of circumstances, we could in fact be stuck either side of $50 for much of 2017; a point one made forcefully at a lively EMF debate. 

Constantly lurking in background is possible cooperation between OPEC and Russia over the issue of freezing and/or cutting oil production. According to Iraq's governor to OPEC Falah Alamri, a featured speaker at the EMF, circumstances were right for oil producers to seal an output freeze deal.

"There was no deal in earlier attempts [in February and April in Doha] because the circumstances weren't right for producers to strike a deal. This time things are different because circumstances are little bit better and would help in reaching a deal," he told the audience. 

However, it’s not reaching a deal that would be the problem. The real problem will arise when the powers that be sit down and try to work out how to implement the deal! Overall, some lively conversations were held about the market direction with a broad spectrum of views. It was great being back here, but that’s all from the UAE folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo 1: VLCC Kelly moored at the Port of Fujairah, UAE. © Gaurav Sharma, September 2016. Photo 2: Gaurav Sharma (left) with Matt Stanley, Fuel Oil Broker at Freight Investor Services at the Energy Markets Forum 2016 © Gulf Intelligence.

Shale gale blows from Appalachian fields to Grangemouth refinery

The Oilholic has bid farewell to the Big Apple, and finds himself visiting a shale gas drilling site in Switzerland Township, Eastern Ohio, via Pittsburgh, where there is something rather unique going on from a European perspective. 

It seems Ineos, the very Alpine and European Switzerland-headquartered petrochemicals firm, and Consol Energy (which owns several Marcellus hale drilling sites), have come together to dispatch shale gas from the US of A to the old continent.

Given serial British industrialist and founder of Ineos Jim Ratcliffe is involved in the enterprise – there are no half measures.

The company has commissioned eight-dragon class ships, with an investment of $2bn (£1.54bn) towards shipping more than 800,000 tonnes a year of ethane from Pennsylvania to Grangemouth (UK) and Rafnes (Norway). 

Each of the ships is capable of carrying over 27,500 cubic meters of gas sourced from the Marcellus shale. Norway has already received its first consignment with the UK tipped to receive its first one on September 27th. 

Ratcliffe’s petrochemicals business needs steady, reliable feedstock and exporters such as Consol, need buyers offering better proceeds than currently on offer stateside. So natural gas from Ohio and Pennsylvania is finding its way via a physical pipeline to Marcus Hook Terminal in Philadelphia, from where it gets dispatched via a virtual pipeline of these eight ships constantly moving the gas to Europe, providing Ineos with gas for the foreseeable future.

While implications for Europe are huge, what it means for US exporters is no less significant. Take Consol itself, a company moving away from its coal mining heritage dating back over 150 years, to natural gas exploration and production. 

It has one of the largest acreage in the Appalachian, and is slowly divesting coal assets, delving deeper into gas exploration. In more ways than one, Pennsylvania itself appears to be going through an economic renaissance along with much of the Rustbelt courtesy of shale gas exploration. 

Moving on from Eastern Ohio, and before hopping on the flight back home, the good folks at Consol took also yours truly to an onstream shale gas extraction facility actually on Pittsburgh airport land (see above right). Process refinements, extraction techniques and automation needed to drill such wells is also moving up in leaps and bounds. Compared to the Oilholic’s last visit to a shale gas extraction facility in 2013, drilling times have halved.

Automation also enables drilling to continue 24 hours a day, seven days a week with fewer personnel. Of course, the basics remain the same – i.e. drillers often drill vertically down 8,000 to 10,000 feet before horizontal drilling commences, followed by fracking.

As for the controversy that almost inevitably accompanies fracking, Tim Dugan, chief operating officer of Consol, says a well planned and thought out fracking process “does not cause earthquakes” with bulk of what's in the fracking fluid being water and rest of the materials fully revealed.

Dugan also says seismic studies have improved in step with the shale gas industry, helping drillers avoid faultlines that could potentially cause tremors.

Ineos is hoping to relay Dugan’s message, and the economic transformation shale has brought to the rustbelt, back to the UK.

Not only is Ineos instrumental in exporting US shale gas, it also holds 30 shale exploration licences in UK that it hopes will one day revive the British oil and gas industry. There's much promise, but its early days yet. That’s all from the USA for the moment folks, its been a memorable visit to another shale extraction site; one's first outside of Texas.

However, just before one takes your leave, a special shout out to Mike Fritz of Consol Energy, who accompanied this blogger over two days with various stopovers from Eastern Ohio to Pennsylvania, enduring traffic jams, pesky questions, site visits and information requests – all of which were met with a friendly smile. Keep reading, keep it crude! Next stop London Heathrow.

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© Gaurav Sharma 2016. Photo 1: Consol Energy's shale gas drilling site in Switzerland Township, Ohio, USA. Photo 2: Consol Energy's shale pad on Pittsburgh Airport Land, Pennsylvania. Photo 3: The Oilholic at a Shale drilling site, Ohio, USA © Mark Simpson, September 2016

Oil bust of 2015 worse than you thought

While much of Wall Street appears to be at peace with the ‘lower for longer’ oil price slant, new research suggests the industry slump of 2015 was not as bad as we thought stateside; it was actually much worse! 

According to ratings agency Moody's, the oil bust that began in 2015 may turn out to be on par with the telecoms industry collapse of the early 2000s, and worse still it continues to fester. 

Both in terms of the number of recorded bankruptcies, as well as the recovery rates for creditors – 2015 was annus horribilis, with 2016 showing signs of making it look tame.

David Keisman, Senior Vice President at Moody's, says the agency recorded 17 oil & gas bankruptcies in 2015, with 15 coming from the Exploration & Production (E&P) sector, one from oilfield services, and one from drilling. Furthermore, Moody's E&P bankruptcies have accelerated in 2016, with the year-till-date figure about double that for all of 2015.

"The jump in oil and gas defaults that was driven by slumping commodity prices, was primarily responsible for the increase in the overall US default rate in 2015 and continues to fuel it in 2016. When all the data is in, including 2016 bankruptcies, it may very well turn out that this oil & gas industry crisis has created a segment-wide bust of historic proportions," Keisman adds.

That’s because during the telecoms collapse, Moody's recorded 43 company bankruptcies in the three-year period between 2001 and 2003.

Revealing further data, the agency said firm-wide recovery rates for E&P bankruptcies from 2015 averaged only 21%, significantly lower than the historical average of 58.6% for all E&P bankruptcies filed prior to 2015, and the overall historical average of 50.8% for all types of corporates that filed for bankruptcy protection between 1987-2015.

At the instrument level, reserve based loans on average recovered 81%, significantly lower than the 98% recovered in prior energy E&P bankruptcies from 1987-2014. Similarly, other bank debt instruments also on average recovered much less than in previous bankruptcies. For their part, high yield bonds recovered a dismal 6%, compared to a recorded rate in the low 30% in previous E&P bankruptcies.

Finally, Moody’s also notes that “distressed exchanges did little to stave off bankruptcies. More than half of the E&P companies that completed distressed exchanges ended up filing for Chapter 11 bankruptcy protection within a year.”

The agency's sobering take follows those of its ratings industry rivals, with Fitch noting that all European oil majors are likely to generate large negative free cash flows for the full-year 2016, and S&P observing that energy and natural resources segment has the highest concentration of global corporate defaults by sector accounting for 65 issuers, or 56%, of the 117 defaults worldwide in the year to August-end. 

Away from industry doom and gloom, and just before yours truly bids goodbye to the Big Apple, one had the invitation to attend the ICIS Kavaler Award Gala reception sponsored by the Chemists Club at the City’s Metropolitan Club. 

This year’s winner was British serial Industrialist Jim Ratcliffe, the founder of chemicals firm Ineos. According to ICIS, Ratcliffe is the first foreign winner of the award, decided by his peers in the chemicals business. 

Pre-gala, the Oilholic had a drink to that; albeit one which was shaken not stirred, quite like much of the oil & gas industry is at the moment. That’s all from New York folks, with Pittsburgh, Pennsylvania calling next! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo 1: Wall Street Signage, New York, USA. Photo 2: The Oilholic in The Big Apple © Gaurav Sharma, September 2016

Views from Wall Street on oil market volatility

The Oilholic finds himself 3,460 miles away from London in New York, with Wall Street giving the crude market yet another reality check. In the last few months, money managers of all description, not just our friends in the hedge fund business, are scratching their heads having first seen a technical bear market in July, only for it to turn in favour of a technical bull market in August!

But now, with all that phoney talk of producers coming together to freeze oil production having fallen by the wayside, both Brent and WTI have started slipping again. 

Not one Wall Streeter the Oilholic has spoken to since arriving in the Big Apple seems to discount the theory that oil may be no higher than $50 per barrel come Christmas, and even that might be a stretch. 

In a desperate bid to keep the market interested in the production freeze nonsense, the Saudis and Russians pledged cooperation ensuring "oil market stability" at no less august a venue than the G20 summit in China earlier this month. Of course, as no clear direction was provided on how that "stability" might actually be achieved and nothing revealed by way of production alterations or caps, not many are quite literally buying it – not on Wall Street, not in the City of London.

Forget the shorts, even the longs brigade have realised that unless both the Saudis and Russians, who between them are pumping over 20 million barrels per day (bpd) of oil, announce a highly unlikely real terms cut of somewhere in the region of 1 to 1.5 million bpd at the producers’ informal shindig on the sidelines of International Energy Forum (due 26-28 September) in Algiers, price support would be thin on the ground.

In fact, even a real terms cut would only provide short-lived support of somewhere in the region of $5-10 per barrel. As a side effect, this temporary reprieve would boost fringe non-OPEC production that is currently struggling with a sub $50 oil price. Furthermore, North American shale production, which is proving quite resilient with price fluctuations in the $40-50 range, is going to go up a level and supply scenarios would revert to the norm within a matter of months.

A number of oil producers would substitute the hypothetical 1-1.5 million bpd Riyadh and Moscow could potentially sacrifice. That’s precisely why Wall Street is betting on the fact that neither countries would relent, for among other things – both are also competing against each other for market.

Another added complication is the uncertainty over oil demand growth, which remains shaky and is not quite what it used to be. Morgan Stanley and Barclays are among a rising number of players who think 2016 might well end-up with demand growth in the region of 625,000 to 850,000 bpd, well shy of market think-tank projections of 1.3 million bpd.

Trading bets are mirroring those market concerns. Money managers sharply decreased their overall bullish bets in WTI futures for the week to September 6th, and also reduced their net position for a second straight week, according to Commodity Futures Trading Commission (CFTC) data.

In numeric terms - "Non-commercial contracts" of crude oil futures, to be mostly read as those traded by paper speculators, totalled a net position of +285,795 contracts. That’s a change of -55,493 contracts from the previous week’s total of +341,288; the net contracts for the data reported through August 30th.

The speculative oil bets decline also dragged the net position below the +300,000 level for the first time in nearly a month. That’s all for the moment from New York folks, as the Oilholic leaves you with a view of Times Square! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo 1: Wall Street & New York Stock Exchange, USA. Photo 2: Times Square, New York, USA © Gaurav Sharma, September 2016

Fuel hedging as oil stays ‘lower for longer’

The last decade has seen extreme volatility with unprecedented price swings. Having been at $115 per barrel in June 2014, oil slipped below $30 at one point in less than two years, driven lower by overproduction, harking back to the kind of volatility we saw during the global financial crisis of 2008-09. 

While the latter was down to a dip in demand, and the former is being caused by oversupply sentiment, volatility makes hedging crucial for fuel consuming companies. Two experts from financial consulting firm Volguard – Simo Mohamed Dafir and Vishu N. Gajjala – have made a brilliant attempt to tackle subject via their book Fuel Hedging and Risk Management published under the current batch of the Wiley Finance series.

Acknowledging the turbulent times faced by fuel derivative providers, Dafir and Gajjala, set about offering their own hedging solutions to those hoping to manage fuel price volatility, by putting forward strategies from origination to execution of a hedge within confines of a holistic risk management structure.

This book, of just under 300 pages split by 10 detailed chapters, begins with a basic overview of inherent market risks and the strategic nature of the oil and gas business, before moving on to tackling fuel derivative instruments.

Subsequent strategic dialogue moves on to scenario analysis, derivative term sheets and market curves for those starting out on their careers. Concurrently, advanced practitioners in the fuel derivatives market will appreciate Dafir and Gajjala’s treatment of price, volatility and exposure optimisation models, as well as credit risk and associated Company Voluntary Arrangement [or “CVA”] cost examinations.

Key bits of the text are accompanied by detailed case studies and examples treating real-life trading scenarios. The Oilholic feels such a format helps readers appreciate the tone and complexity of risk management of derivatives far better than a bland linear treatment of the subject. One find’s the narrative is just as useful for established players, as well as newcomers to the fuel hedging world.

However, this blogger would attach a caveat – for those contemplating a career in the fuel hedging business – Dafir and Gajjala’s work is not a starter kit, rather a very solid, splendid second title that serves as a constructive follow-up to an initial baptism to the derivatives world. 

The Oilholic would be happy to recommend this book to commodity traders seeking a refresher course, quantitative professionals in the fuels space, risk managers and corporate treasurers at transportation firms, including airlines and shipping businesses whose needs and concerns it directly addresses. It could also be of immense help to those looking to develop a corporate framework for financial risk analysis.

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© Gaurav Sharma 2016. Photo: Front Cover – Fuel Hedging and Risk Management © Wiley Publishers, 2016

Threat of the other & US energy security

The intertwining of US foreign policy with the country’s energy security has been a matter of public discourse for decades. The connection only witnessed a dilution of sorts roughly six years ago when the US shale bonanza started easing the economy’s reliance on oil imports in meaningful volumes. 

In an era of ‘lower for longer’ oil prices and shale’s contribution to US energy security being hot topics, author Sebastian Herbstreuth refreshingly reframes the country’s ‘energy dependency’ as a cultural discourse via his latest book – Oil and American Identity published by I.B. Tauris. 

In a book of 270 pages, split by six detailed chapters, Herbstreuth attempts to draw and examine a connection between the US energy business and American views on independence, freedom, consumption, abundance, progress and exceptionalism.

Stateside, foreign oil is selectively depicted as a serious threat to US national security. However, that selective depiction is contingent upon the ‘foreignness of foreign oil’ to quote the author. Herbstreuth shows how even reliable imports from the Middle East are portrayed as dangerous and undesirable because the region is particularly 'foreign' from an American point of view, while oil from friendly countries like neighbouring Canada is cast as a benign form of energy trade.

The author has somewhat controversially, and rather brilliantly, recast the history of US foreign oil dependence as a cultural history of the world’s largest energy consumer in the 20th Century.

That age-old concern about there being an existential threat to the US, as a society built on the internal combustion engine and mobility, is in part born out of the very cultural fears flagged by the author in some detail.

The striking thing is that the fear still lurks around despite the rising contribution of US shale oil and gas to US energy security. Reading Herbstreuth’s work you feel that in many ways the said fear slant is never going to go away, for it is as much a cultural issue as a geopolitical or economic one, neatly packaged by the political classes for the ultimate ‘Hydrocarbon Society’.

The Oilholic would be happy to recommend Oil and American Identity to fellow analysts, those interested in the oil and gas business and cultural studies students. Furthermore, a whole host of readers looking to ditch archaic theories and seeking a fresh perspective on the crude state of US energy politics would find Herbstreuth’s arguments to be pretty powerful.

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© Gaurav Sharma 2016. © Photo: Front Cover – Oil and American Identity © I.B. Tauris, 2016.

On crude producers’ talks, analysts & academics

As the second month of the third oil trading quarter of 2016, comes to a close both Brent and WTI futures remain in technical bull territory despite a recent cooling down of oil prices. 

The Oilholic is struggling to find any market analysts – including those at UBS, Commerzbank, Morgan Stanley or Barclays to name a few – keeping their faith in (a) the oil producers’ talks pencilled in for end-September producing anything tangible, and (b) whether an output freeze would actually work with oil production in Russia and Saudi Arabia at record highs. 

A real terms cut in production could provide a short-term boost to prices but it does not appear to be even a remote possibility at this point. Yet, the long callers continue to bet on an uptick if the latest US CFTC data is anything to go by. As the Oilholic pointed out in July, demand projections continue to head lower, so yours truly did ask the question in a recent Forbes piece – are the talks as much about stabilising oil supply, or a likely post-Sept dip in China’s demand.

As for viewing the oil price via the prism of demand permutations, Fitch Ratings’ latest assumption for ratings purposes just about sums it up. The rating agency assumes Brent and WTI will average $42 per barrel in 2016, up from its $35 base case in February.

“However, we do not believe that the rapid price recovery seen in the first half of 2016 will continue. The sub-$30 prices at the start of the year approached cash costs for many producers and were unsustainable in all but the very short term. Prices in the $40-$50 range allow most producers to break even on a cash basis, if not to cover sunk costs,” it added. 

Furthermore, market expectations that US shale production will begin to rebound at prices above $50, will keep prices below that level until a supply deficit has eroded some of the inventory overhang.

Away from market shenanigans, another one of those research papers predicting there are no viable alternatives to oil and gas for meeting global energy needs arrived in the Oilholic’s mailbox. This one is from the Head of Petroleum Geoscience and Basin Studies research and Chair of Petroleum Geoscience at University of Manchester Dr Jonathan Redfern and energy recruiters Petroplan; overall an interesting read. 

Sticking with ‘crude’ academic papers, another interesting one was published this month by Luisa Palacios of Columbia University’s Center on Global Energy Policy charting Venezuela’s growing risk to the global oil market.

The country’s problems are well documented, but Palacios claims glaring losses in oil production have "yet to translate into a commensurate fall in oil exports", due to the heavy toll taken by the economic collapse on domestic demand. (PDF download link)

Furthermore, the stability of exports reflected in the data in first half of the year "masks a deteriorating trend with June exports already more than 300,000 barrels per day lower than last year’s average."

Despite all the headline noise about Venezuela, the most severe risks to oil markets thus still lie ahead. Certainly food for thought, but that’s all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: Oil platform © Cairn Energy Plc. 

Pump more, even if oil price slumps more mantra

As oil remained in a technical bear market for much of July, we saw well timed quips by major oil producing nations, within OPEC and beyond, fanning chatter of another round of talks aimed at freezing production. And well, its done the trick – both Brent and WTI futures have bounced back from the their low point of August 2, to an above 20% rise as the Oilholic writes this post, i.e. a technical bull run!

Yours truly cannot consciously recommend buying into this phoney rally, because any talks between OPEC and non-OPEC producers face the same impediments as last time, with Iran and Iraq remaining non-committal, and those calling for a freeze (Saudi Arabia and Russia) only willing to do so at record high levels of production. For the Oilholic’s detailed thoughts on the issue, via a Forbes post, click here. 

However, it’s not just National Oil Companies who are in full on production mode. It seems the largest independent US and Canadian oil exploration and production (E&P) companies are still paying their executives more to focus on boosting production and replacing reserves, rather than conserving capital and reducing debt, according to Moody's.

Only four companies of the 15 companies, the ratings agency sampled in July, even included debt-reduction goals as part of their broader financials, or balance-sheet performance goals. For example, Pioneer Natural Resources (rated by Moody’s Baa3 stable) included a ratio of net debt-to-EBITDAX to account for 15% of its executives' target bonus allocation.

Fourteen of the sampled companies use performance award plans linked to relative total shareholder return. Christian Plath, Senior Credit Officer at Moody's, opined that the strong and direct focus on share prices raises certain credit risks by rewarding aggressive share repurchases and the maintenance of dividends even when cutbacks would be prudent.

“The focus on shareholder returns also reflects the E&P companies' high-growth mindset, and may motivate boards and managers to focus on growth over preserving value. Nearly all of the awards are in some way linked to share-price appreciation. While large companies generally try to tie long-term pay closely to share-price performance, the link appears stronger in the E&P sector,” he said. 

Furthermore, Moody’s found that despite the slump in oil prices that has dented E&P company returns, production and reserves growth targets still comprised almost a quarter of named senior executives' target bonuses in 2015.

“This makes it the most prevalent metric in annual incentive plans ahead of expense management and strategy. Given our pessimistic industry outlook, this system of compensation is negative for credit investors and suggests that many E&P companies are finding it difficult to shed their high-growth strategies," Plath added.

Drawing a direct connection between what Moody’s says from a sample of 15 North American E&P companies and the gradually rising US and Canadian rig counts would be an oversimplification of the situation.

However, taken together, both do point to producers stateside either getting comfortable in the $40-50 per barrel price range or finding ways of carrying on regardless with the full backing of their paymasters. Any price boosting production freeze by global oil producers will be warmly welcomed by them. That’s all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: Pipeline warning sign, Fairfax, Virginia, USA © O. Louis Mazzatenta / National Geographic.

Those rapidly sliding oil demand projections!

It’s been another mad month for the Oilholic and might one add for the oil markets as well. At the conclusion of the OPEC summit in Vienna back in June, there was a sense that a slow, but sure road to rebalancing somewhere between March and June 2017 would be the order of the day.

Then Brexit happened, Italian banks crisis escalated, Chinese refiners driven on by cheaper crude imports ensured a gasoline glut hit the Asia Pacific market, while US refiners went on a binge largely off cheap Iraqi imports.

Donald Trump and his protectionist stance remains fighting fit as a painfully long US presidential election campaign finally enters its final phase. China’s economy remains lethargic, as do global central banks when it comes to monetary stimulus – Bank of Japan, US Federal Reserve, Bank of England – take your pick.

Put it all together and factor in the return of barrels, taken out earlier this year, from Canada to Nigeria, Venezuela to Colombia, and you come up with nothing other than a bearish market as July draws to a close. In fact, oil benchmarks are down 20% since the OPEC summit, and with good reason – neither is demand going anywhere, nor is oversupply dissipating.

However, it’s demand woes that are knocking market sentiment more at the moment. OPEC and IEA continue to maintain global oil demand growth projections for 2016 in the region of 1.2-1.4 million barrels per day (bpd). Given the current set of market circumstances, yours truly is not at peace with the said range. City analysts aren't either.

Barclays' commodities research team reckons demand is likely to be in the region of 1.1 million bpd, several others put it around 1 million bpd, but last week Morgan Stanley said even its conservative forecast of 800,000 bpd might not be met.

In a note to clients on July 24, the investment bank’s analysts subsequently wrote: "We are cutting our forecast for global refinery demand for crude oil (runs) to 625,000 bpd from 800,000 bpd on expected run cuts, with downside risk to these low numbers.

"We also recently lowered our third quarter average Brent price forecast from $50 per barrel to $45, and see more downside risk."

In fact, downside risk is likely to become the order of the day, week and month. As the Oilholic said on TipTV, there is little out there to fire-up demand. Finally, while the mad month ensured the Oilholic didn’t blog here as frequently as he’d like, here are some of one’s market quips in IBTimes UK and Forbes over the last few weeks. 

There’s of course the little matter of Shell’s 72% decline in quarterly profit, British Gas owner Centrica’s continued loss of UK customers, and of course whether BP is finally getting its house in order. 

Here is one’s take on demand fears, and last but not the least – Russia upping its oil production ante. That’s all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: Abandoned petrol station in Preston, Connecticut, USA © Todd Gipstein / National Geographic.

Crude markets post Brexit: Keep calm & carry on

Right after the OPEC summit, we went into the home strait of the UK’s June 23rd referendum on its membership of the European Union, which has resulted in a Brexit or to put it more blandly – Britain’s exit from the EU.

 

It drained the life out of talking about anything else, or writing about anything else or blogging about anything else. So please accept the Oilholic’s apologies for not responding on wider ‘crude’ affairs via this blog for much of the month.

 

The deed is done; the British public voted 52% to 48% in favour of exiting the European Union, and to quote one departing EU official – "what has been done cannot be undone." The development followed a predictable market kerfuffle, with some comparing or at least attempting to compare its aftermath to the Lehman Brothers collapse. As the Oilholic said on a recent broadcast, serious though it might be, it is not quite on that scale for the oil markets.

 

Oil will continue to lurk around the $50 per barrel level and struggle to cap that over the next six months, and much of it would have little direct connection to the Brexit vote. On the eve of the vote, yours truly looked at FX, oil and gold plays via a Forbes column, and did an oil market impact assessment or a crude Brexit post mortem exactly a week on from the outcome of the result.

 

Brexit’s only contribution has been to add to the prevailing market sentiment that oil demand growth will not quite fire up. Most demand growth projections, for instance those of the IEA and OPEC, are in the 1.2 – 1.4 million barrels per day (bpd) range. The Oilholic suspects come the end of the year, even the lower end of that range might not be matched.

 

Brexit and the uncertainty in Europe would have some impact, but much of the oil market is reliant on emerging market demand and its direction should be the primary cause for concern. Europe accounts for only 15% of global trade. The direction of global trade and manufacturing is eastwards, by default so is the direction of the oil market.

 

Furthermore, there is still plenty of oil around according to physical traders. What was one of the biggest oil gluts of all time last year, will not be resolved in a matter of months. The Oilholic has always maintained that the oil market will not rebalance until much later into 2017 and the oil price will stick around $50 level until December.

 

Given that context, Brexit is just another crude problem, but not the only problem. Keep calm and carry on!

 

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© Gaurav Sharma 2016. Photo: Oil rig in South Asia © Cairn Energy.

A Saudi briefing, Iran's barrels & OPEC’s Sec Gen

Half of the world’s press descended on the OPEC HQ, in Vienna, Austria, half expecting that not much will transpire here. And well, that is exactly what happened when proceedings ended on 2 June – except that there were certain key developments before, after and during the 169th OPEC ministers’ meeting, some subtle and some not so subtle!

Let’s start with the subtle – for the first time in three years, a Saudi prince accompanied his country’s delegation to OPEC flanked by a new oil minister in the shape of Khalid Al-Falih. The Saudi delegation largely kept mum as far as the press goes in the lead up to the conference, but the prince himself took time to hold and address an off-record briefing with oil market analysts away from the prying eyes of the media.

Off-record means what it says on the tin dear readers, as the Saudis wanted the press out of it. So the Oilholic has to respect that; even though one got a 100% lowdown via third parties! Yours truly can however share some nuggets minus specifics.

The Saudi delegation, a veritable who’s who of the country’s energy industry, made the slickest presentation in recent memory and in the Oilholic’s opinion perhaps the most data heavy one too. It sounded like Saudi Arabia was making a concerted effort to tell the wider world it meant business when it comes to the diversification of its economy, but make no mistake - the briefing on the eve of the 169th OPEC conference was about something else entirely.

The proverbial kings – as they are of the oil and gas world – appeared to be preparing for a game of chess. As the Oilholic and selected colleagues yours truly has known for years read it – ‘wethinks’ the Kingdom has thrown the production stakes gauntlet back to Iran, which has been asserting its right to pump as much oil as it likes in a post sanctions-era.

The Islamic Republic has made no secret of its desire to bump up production to 4 million barrels per day (bpd) within a year. Never say ‘never’, but the Oilholic has made no secret of his conjecture either that the chances of that happening given infrastructural impediments, above anything else, are slim to negligible. One suspects experts advising the Saudis know just as much.

So the Saudis reckon they may as well throw the gauntlet back to Iran. “You want to pump 4 million bpd let’s see you do it, and if you do well and good – our ‘crude’ client base is intact we’ll pump what we want to.” Now you might think that suggests OPEC stays where it is, but not quite.

That’s because the Saudis (and by extension other Gulf exporters) would potentially use this as the basis of future OPEC dialogue, whether or not Iran gets to that level. Moving on from the subtle off-record stuff to the not-so-subtle on-record buzz on summit day, an ancillary thought was whether or not OPEC will appoint a new Secretary General to replace the long standing Abdalla Salem El-Badri, who has been officiating in an “acting capacity” since 2013.

Internal discord, and tension between the Iranians and the Saudis meant the oil producers’ collective, while even agreeing to readmit a net importer in the shape of Indonesia, could not get itself to agree on a compromise candidate for the post. And so El-Badri went on and on, and well on and on. 

However, finally Mohammed Sanusi Barkindo, from Nigeria, was named as Secretary General with effect from 1st August 2016, for a period of three years, bringing to a close a near decade-long term of his predecessor. Additionally, Gabon was readmitted to OPEC after having left in 2014. 

So all-in-all, it was not a mundane affair at all, with some sense of solidarity within what is soon to become a 14 member oil producing block. Perhaps a little solidarity is all what the market was seeking from OPEC at a time of low expectations. That’s all from the 169th OPEC ministers’ meeting folks! Keep reading, keep it crude!

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© Gaurav Sharma 2016. Photo: Exterior of OPEC Secretariat in Vienna, Austria © Gaurav Sharma.

OPEC issues no word on quota (again!)

The 169th OPEC ministers meeting has concluded in Vienna, Austria with the producers' collective yet again failing to reveal its 'official production quota'. 

But analysts took heart from the fact that OPEC finally appointed a new Secretary General - Nigeria's Mohammed Sanusi Barkindo - to succeed Abdalla Salem El-Badri.

There might well be discord with respect to Iran's bid to ramp production up to 4 million barrels per day, but the appointment of a compromise candidate as Secretary General is definitely a step in the right direction for us lot in the analyst community.

OPEC also observed that since its last meeting in December 2015, crude oil prices have risen by more than 80%, supply and demand is converging and oil and product stock levels in the OECD have recently shown relative moderation.

Additionally, Gabon will be readmitted to the OPEC fold with effect from 1 July, taking OPEC's membershp up to 14, having already readmitted net oil importer Indonesia last year.

Finally, the next OPEC meeting is on 30th November. That’s all for the moment from Vienna folks! Keep reading, keep it crude!

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© Gaurav Sharma 2016. Photo: Press conference at the conclusion of OPEC's 169th Ministerial Meeting in Vienna, Austria © Gaurav Sharma, June 2, 2016.

‘Mum’s the word’ for new Saudi oil minister

After a fact finding trip to Houston, Texas, the Oilholic finds himself back in Vienna, Austria for the 169th OPEC Ministers’ meeting. Based on initial soundbites, the 13 member oil producers’ collective is in a rather content mood. Well if you exclude the Venezuelans that is, who are decidedly grumpy by virtue of their own circumstances.

Recent production outages in Canada, Colombia, and OPEC members Venezuela and Nigeria have served to support the oil price which has lurked around the $50 per barrel level for a while now. It is also now manifestly apparent that non-OPEC oil producers are suffering in an era of lower for longer oil prices. 

The Oilholic recently penned his thought on troubles of US shale players – flag bearers of non-OPEC production – in a Forbes piece, and that’s not where the trouble ends. Non-OPEC production as a whole remains in a precarious spot. Nonetheless, interpretation of the market situation differs from OPEC member to member, with the Venezuelans correctly querying where the oil price would go once outages end. 

There’s plenty of chatter here ahead of the meeting, but one man has largely kept mum – that’s none other than Saudi Oil Minister Khalid Al-Falih, who replaced Ali Al-Naimi, one of OPEC’s most colourful characters last month.

It is doubtful that a new minister would alter an old Saudi policy. But the new man in charge has stayed away from the media since his arrival on Tuesday. Much to the disappointment of the world’s scribes, there was no Al-Naimi style power walk on Vienna’s Ring Road by new man either.

As for the analyst community, none of us expect any movement on the production quota front, although the rumour mill suggests OPEC might well be on the verge of finally appointing a new Secretary General. For an OPEC preview, check out the Oilholic’s submission to the International Business Times.

Finally, just before one takes your leave, here are two Forbes posts – on Mexico’s upcoming offshore round and US exports respectively – to keep you busy. That’s all for the moment from Vienna folks, plenty more to follow over the coming days! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: OPEC flag © Gaurav Sharma.