Kuwaiti strikers propping up crude prices

The ongoing Kuwaiti oil strike has cut the country’s output for a fourth successive session, US inventory data overnight was price supportive and Iraq is fanning talk of another oil producers’ meeting in May. 

End result is that Brent is above $45 per barrel but remains vulnerable to a correction. Non-OPEC supply declines have started to bite, but risk premium won’t kick in until excess oil falls below 1 million barrels per day (bpd). Even with ongoing refinery maintenance in certain corners of the world and the Kuwaiti oil strike - which has seen its output plummet to 1.5 million bpd from 2.8 million bpd - there is still plenty of the crude stuff on the market.

Whichever way both Brent and WTI futures go, the $40-50 per barrel range is likely to be maintained, and a drop to $35 per barrel remains a distinct possibility. Meanwhile, an uptick in crude oil futures (and iron ore) is driving forex market trends too with beleaguered commodities linked currencies getting some respite.

Mexican peso, Aussie and Canadian dollars are all up versus the greenback. Kit Juckes, head of forex at Societe Generale, said, "With BHP warning of a near-term correction (downwards) and with output of iron ore soaring, the rally should be treated with a bit of caution, but it's going to go on supporting the Australian dollar for now.

"The oil price rally by contrast has better foundations as the supply/demand imbalance is slowly being resolved and while the upside is limited, confidence that the cycle has turned is growing and that will remain a big FX driver. We're long AUD/NZD and the iron ore bounce should help, and short USD/CAD, EUR/RUB and GBP/NOK, all trades which get help from rising oil prices."

Reverting back to the oil glut story - it has some way to run yet, but for the moment Iran ought to thank Kuwaiti strikers for neutralising the Doha Talks farce. That’s all for the moment folks! Keep reading, keep it crude!

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

‘Doh-a Farce’? Brace for $35/bbl Brent?

The Oilholic is rather surprised that some people are actually surprised the Doha talks between major oil producers turned out to be a bit of a farce.

Well, in case you haven’t heard – the overhyped meeting between OPEC and non-OPEC crude producers aimed at introducing a production freeze has ended without an agreement.

Here is one’s take on the development in a Forbes column. The Iranians never turned up in the first place, and the 18 or so oil ministers who did, saw Saudi Oil Minister Ali Al-Naimi insist that there would be no coordinated oil production freeze unless the Iranians came on board. And there you have it – a predictable outcome, without the Saudis giving an inch.

So what’s next? The Oilholic deems a shot term return for Brent futures down to $35 per barrel as highly likely. If it is not achieved intraday today, we should probably get there early this week thereby wiping out some of the froth that built up ahead of the Doha non-event - unless of course breaking news of a Kuwaiti oil strike has the opposite effect. 

At the time of writing this post, both Brent and WTI front month futures contracts are trading down by over 6% and slipping towards the mid-thirties.

And here’s another prediction – one doesn’t expect OPEC to achieve anything at its next meeting in June either. Both Iran and Saudi Arabia are holding firm, and in no mood to compromise – something that is unlikely to change overnight.

Finally, cutting through all the pre and post Doha Talks hullabaloo, the Oilholic has also not altered his market forecasts – of Brent at or just below $50 per barrel by the end of 2016, supply-demand rebalancing by Q1 2017 and a medium term phase of low prices well shy of the mid-2014 highs before the price curve took a turn for the worse. That’s all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: Oil extraction site in Oman © Shell

Volatile yet flat-ish Q1 points to $40-50/bbl price

The first quarter of 2016 has been pretty volatile for oil benchmarks. Yet if you iron out the relative daily ups and downs in percentage terms, both global benchmarks and the OPEC basket are marginally higher than early January (see chart left, click to enlarge). 

Brent, at $37.28 per barrel back then, ended Friday trading at $41.78, while WTI ended at $39.53, up from $37.04 in early January. That’s a fairly flat outcome following the end of a three-month period, but in line with the Oilholic’s conjecture of an initial slow creep above $40 per barrel by June, followed by yet another crawl up to  $50 per barrel (or thereabout) by Christmas (as the Oilholic opined on Forbes).

Moving on from pricing matters, a new report from GlobalData suggests crude refining capacity is set to increase worldwide from 96.2 million bpd in 2015 to 118.1 million bpd by 2020, registering a total growth of 18.5%.

In line with market expectations, the research and consulting firm agrees that global growth will be led by China and Southeast Asia. A total of $170 billion is expected to be spent in Asia alone to increase capacity by around 9 million bpd over the next four years, GlobalData added.

Matthew Jurecky, Head of Oil & Gas Research at the firm said: “The global refining landscape continues its shift eastwards; 40% of global refining capacity is projected to be in Asia by 2020, up from around 30% in 2010.

“China has led this growth, and is projected to have a 15% share of global crude refining capacity by 2020. This activity is putting pressure on other regional refiners, especially now that China has become a net exporter, and will become a larger one.”

In Europe, growth is expected to occur at a substantially slower rate. Although demand is decreasing and is less competitive, older refineries in Western Europe are being closed, these factors are being countered by investment in geographically advantaged and resource-rich Russia, which sees Europe’s capacity increasing marginally from 21.7 million bpd in 2015 to 22.5 million bpd by 2020.

Away the refining world to the integrated majors, with a few noteworthy ratings actions to report – Moody’s has downgraded Royal Dutch Shell to Aa2 with a negative outlook, Chevron to Aa2 with a stable outlook, Total to Aa3 with a stable outlook and reaffirmed BP at A2 with a positive outlook. 

Separately, Fitch Ratings has affirmed Halliburton at A-, with the oilfield services firm’s outlook revised to negative. That’s all for the moment folks, keep reading, keep it crude! 

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Beyond a crude April Fool’s joke

There’s still just too much oil around, with physical traders reporting anything between 1.75 to 2.5 million barrels per day (bpd) of excess supply on the market.

Only thing that’s changed is that anecdotes of a 3 million bpd surplus have declined, particularly so in Asia. That is a positive of sorts, but unless excess supply falls to around the 1 million bpd level – geopolitical risk premium won’t kick in like it used to before the glut took hold.

In the backdrop of course, is a Saudi-Iranian spat on the level of each others oil exports that’s extending well beyond a crude April Fool’s day joke. On Thursday, Saudi Deputy Crown Prince Mohammed bin Salman told Bloomberg: “If all countries agree to freeze production, we will be among them.”

He added that Iran needed to be among those countries “without a doubt.” The comments come as Iran has decided not to attend oil producers' talks in Doha on April 17. Tehran has called the idea of such a meeting daft.

In response to the Saudi comments, Iranian oil minister Bijan Zanganeh told the Mehr News agency that the Islamic republic would “continue increasing its oil production” and exports. Meanwhile, a Reuters survey published last week indicated that OPEC’s oil production rose in March, after a period of stability in February, following higher production from Iran and near-record exports from southern Iraq.

Its 4 million bpd-plus output was second only to Saudi Arabia among all of OPEC's 13 member nations. Lest we forget, Russian output remains at Soviet era highs of 10.91 million bpd.

Simple truth of the matter is, the Iranians cannot flood the market and are highly unlikely to match their rhetoric of 1 million bpd, not least because they lack the infrastructure and means to do so in a short period of time, and were they to do so, the resulting price dip would come straight back to haunt them.

The Russians have already said they'll look for “alternative means” to curb a production rise, but not by cancelling new exploration. In any case, they lack the means to ramp up output further. As for the Saudis, who still have spare capacity and are willing to freeze were others to do so, it is purely a case of meeting client demands.

As the Oilholic has noted before, they are producing to a level that meets existing export demand for their longstanding clients. As such, they have no need to ramp up the output levels. So phoney chatter of “will they, won’t they” is purely for market consumption and has little connection with reality when it comes to net volume additions or declines, something which would be dictated by market economics!

As for what this blogger expects would come out of Doha – probably an agreement big on public relations spin than a real-terms cut. For argument sake, even if there is a cut of 1 million bpd, the reprieve would be temporary. Futures would rise over the short-term before the reality of tepid demand and considerable oil held in storage triggers another round of correction. Get used to the $40-50 per barrel range. That’s all for the moment folks, keep reading, keep it crude!

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© Gaurav Sharma 2016. Photo: Offshore oil exploration site in India © Cairn Energy.