A Syrian muddle, Barclays on Brent & more

The Brent forward month futures contract for August spiked above US$106 per barrel in intraday trading on Friday at one point. Most analysts cited an escalation of the Syrian situation and the possibility of it morphing into a wider regional conflict as a reason for the 1%-plus spike. The trigger was Obama administration’s reluctant acknowledgement the previous evening of usage of chemical weapons in Syria. The Oilholic’s feedback suggests that more Europe-based supply-side market analysts regard a proactive US involvement in the Syrian muddle as a geopolitical game-changer than their American counterparts. There is already talk of Syria become as US-Russia proxy war.

Add to that Israel’s nervousness about securing its border, jumpiness in Jordon and behind the scenes manipulation of the Assad regime and Syria by Iran. In an investment note, analysts at Barclays have forecasted Brent to climb back to the Nelson figure of 111. Yet a deeper examination of what the bank’s analysts are saying would tell you that their take is not a reactive response to Syria.

In fact, Barclays cites supply constriction between OPEC members as a causative agent, specifically mentioning on-going problems in Nigeria, Libya and shipment concerns in Iraq. For what its worth, and appalling as it might well be, Syria's conflict is only being priced in by traders in passing in anticipation of a wider regional geopolitical explosion, which or may not happen.

Away from OPEC and Syria, the Sudan-South Sudan dispute reared its ugly head again this week. A BBC World Service report on Thursday said Sudan had alleged that rebels based in South Sudan attacked an oil pipeline and Diffra oilfield in the disputed Abyei region. The charge was denied by South Sudan and the rebels.

 

The news follows Sudan’s call for a blockade of South Sudan's oil from going through the former’s pipelines to export terminals to take effect within 60 days. The flow of oil only resumed in April. Both Sudan and the South are reliant on oil revenue, which accounted for 98% of South Sudan's budget. However, the two countries cannot agree how to divide the oil wealth of the former united state. Some 75% of the oil lies in the South, but all the pipelines…well run north.

 

As the geopolitical analysts get plenty of food for thought, BP’s latest Statistical Review of World Energy noted that global energy consumption grew by 1.8% in 2012, with China and India accounting for almost 90% of that growth. Saudi Arabia remained the world’s top producer with its output at 11.5 million barrels of oil equivalent per day (boepd) followed by Russia at 10.6 million boepd. However, the US in third at 8.9 million boepd gave the “All hail shale” brigade plenty of thought. Especially, as BP noted that 2012 saw the largest single-year increase in US oil production ever in the history of the survey.

 

Moving on to corporate news, Fitch Ratings said Repsol's voluntary offer to re-purchase €3 billion of preference shares will increase the group's leverage, partially offsetting any benefit from the proceeds of its recent LNG assets divestment (revealed in March). This reduces the potential for an upgrade or Positive Outlook on the group's 'BBB-' rating in the near term, the agency added. Repsol's board voted in May to repurchase the preference shares partly with cash and partly with new debt.

 

Finally, Tullow Oil has won its legal battle, dating back to 2010, over tax payable on the sale of oilfields in Uganda. On Friday, the company said a UK court had ruled in favour of its indemnity claim for $313 million in its entirety (when the Uganda’s government demanded over $400 million in capital gains tax after Heritage Oil sold assets in the country to Tullow in a $1.45 billion deal).

 

Heritage said it would now evaluate its legal options and could launch an appeal. When the original deal between Heritage and Tullow was concluded, Tullow paid the Ugandan Revenue Authority $121.5 million – a third of the original $405 million tax demand – and put the remaining $283.5 million into an escrow account.

 

That’s all for the moment folks! The Oilholic has arrived in Belfast ahead of 2013 G8 Summit in Northern Ireland under the UK’s presidency, where Syria, despite the meeting being an economic forum, is bound to creep up on the World leaders’ agenda. As will energy-related matters. So keep reading, keep it ‘crude’!

 

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To email: gaurav.sharma@oilholicssynonymous.com

 

© Gaurav Sharma 2013. Photo: Veneco Oil Platform, California, USA © Rich Reid / National Geographic.

OPEC & the downward bias in Black Gold’s value

The OPEC ministers have packed-up and left with no real surprises as the cartel maintained its daily output at 30 million barrels per day (bpd). But in the absence of any real surprises from OPEC, the downward bias in the direction of leading oil futures benchmarks is getting stronger, given the perceived oversupply and a flat, if not dicey, macroeconomic climate. The Brent forward month futures contract plummeted to nearly US$100, seeing a near 2.5% dip from last week (click on graph to enlarge). Given that the trading community had already factored in the outcome of the 163rd OPEC meeting even before it concluded, most appear to be waiting to see whether the US Federal Reserve continues with its monetary stimulus programme. Even if it does so, given the macroeconomic permutations, it is not worth holding your breath for a ‘crude’ bounceback.

 

Far from cutting production, there seem to be murmurs and concern in the hawkish camps of Iran and Venezuela about constantly improving production levels in Iraq. Abdul Kareem al-Luaibi, Iraq’s oil minister, confirmed at a media scrum in Vienna that the country plans to start production at two of its largest oilfields within “a matter of weeks.”

 

Production commencement at Majnoon (which is imminent) and Gharraf (due in July), followed by a third facility at West Qurna-2 (due by December if not earlier) would lift Iraqi capacity by 400,000 bpd according to al-Luaibi. The country’s current output is about 3.125 million bpd. The additional capacity would bolster its second position, behind Saudi Arabia, in the OPEC output league table.

 

The Iraqis have a monetary incentive to produce more of the crude stuff. Sadly for OPEC, it will come at a time the cartel does not need it. Instead of adherence, there will be further flouting of the recently agreed upon quota by some members. Iraq is not yet even included in the quota (and may not be until late into 2014).

 

Non-OPEC supply is seeing the ranks of the usual suspects Russia and Norway, joined ever more meaningfully by Brazil, Kazakhstan, Canada and not to mention (and how can you not mention) – the US, courtesy of its shale supplies and more efficient extraction techniques at Texan conventional plays. So a downward bias will prevail – for now.

 

In fact, Morgan Stanley did not even wait for the OPEC meeting to end before downgrading oil services firms, mostly European ones, based on the conjecture that IOCs as well as NOCs (several of whom hail from OPEC jurisdictions) would allocate relatively lower capex towards E&P.

 

Robert Pulleyn, analyst at Morgan Stanley, wrote and the Oilholic quotes: “With oil prices the key determinant of industry operating cash flow, and given our expectation for an increasingly range bound price environment, we expect industry-operating-cash-flow growth to fall from 14% compound annual growth rate (since 2003) to about 3% in the future. We expect capex growth to fall to around 5% a year to 2020, compared to 18% compound annual growth rate since 2003.”

 

Of the five it downgraded on Thursday – viz. Vallourec, SBM Offshore, CGG Veritas, TGS-NOPEC and Subsea 7 – only the latter avoided a dip in share price following the news. However, Morgan Stanley upgraded John Wood Group, saying it is better positioned to withstand a lower growth outlook for industry spending.

 

As for the price of the crude stuff itself, many analysts didn’t wait for OPEC either with Commerzbank, Société Générale and Bank of America Merrill Lynch (BoAML) all sounding bearish on Brent. BoAML cut its Brent crude price forecasts to $103 per barrel from $111 for the second half of 2013, citing lower global oil demand, rising supplies and higher inventories. The bank expects the general weakness to persist next year and reduced its 2014 average Brent price outlook from $112 to $105 per barrel. So there you have it and that’s all from Vienna folks!

 

Since it’s time to say Auf Wiedersehen, the Oilholic leaves you with a view of the city’s Irrgarten and Labyrinth at the Schönbrunn Palace grounds (see right). Once intended for the amusement of Austro-Hungarian royalty and their guests, this amazing maze is now for the public’s amusement.

 

While visitors to this wonderful place are getting lost in a maze for fun, OPEC ministers going round in circles over a key appointment to the post of Secretary General is hardly entertaining. At such a challenging time for it, the 12-member oil exporters’ club could do with a bit of unity. Yet it cannot even unite behind a single candidate for the post – something which has been dragging on for a year – as rivals Iran and Saudi Arabia continue to hold out for their chosen candidate for the post. Furthermore, it’s taken an ugly sectarian tone along Shia and Sunni lines.

 

Worryingly, this time around, neither the Saudis nor the Iraqis are in any mood for a compromise as the rest of the 10 members wander around in a maze feeling dazed about shale, internal rivalries, self interest and plain old fashioned market anxieties. The Oilholic maintains it’s premature to suggest that a rise in unconventional production is making OPEC irrelevant, but its members are unwittingly trying really hard to do just that! Keep reading, keep it ‘crude’!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Graph: World crude oil futures benchmarks to May 25, 2013 © Société Générale. Photo: Irrgarten & Labyrinth, Schönbrunn Palace, Vienna, Austria © Gaurav Sharma 2013.

As expected OPEC quota stays at 30 mbpd!

As widely expected and in line with market expectations, the 163rd OPEC meeting of ministers ended with the 12 members of the oil exporting club keeping their official collective production quota right where it was – at 30 million barrels per day (bpd).

 

OPEC noted that the “relative steadiness” of crude oil prices during 2013 (to-date) was an indication that the market was adequately supplied, with “the periodic price fluctuations being a reflection of geopolitical tensions.”

 

However, the cartel felt that whilst world economic growth was projected to reach 3.2% in 2013, up from 3% in 2012, downside risks to the global economy, especially in the OECD region, remain unchecked.

 

OPEC said that world oil demand is expected to rise from 88.9 million bpd in 2012 to 89.7 million bpd in 2013, driven “almost entirely” by the non-OECD regions. It also projected non-OPEC supply to grow by 1.0 million bpd.

 

OPEC Secretary General Abdalla Salem el-Badri said, “Taking these developments into account, the second half of the year could see a further easing in fundamentals, despite seasonally-higher demand. In light of the foregoing, we have in decided that member countries should adhere to the existing production ceiling of 30 million bpd.”

 

El-Badri was not prepared to discuss the individual members’ quotas, a figure which OPEC no longer releases for publication. The Secretary General also revealed that no agreement was reached over the election of his successor with the same three candidates – viz the two protagonists Majid Munif (Saudi Arabia) and Gholam-Hussein Nozari (Iran) with compromise candidate Thamir Ghadban (an Iraqi official) – being in the frame.

 

“The candidates remain the same, but if a fresh name comes up then we will examine his/her credentials in the usual way,” the Secretary General said. In his response to the debate about shale’s impact on OPEC members’ fortunes and a possible rise in their spare capacity, El-Badri said the impact of unconventional oil production remains uncertain and if it resulted in a rise in OPEC’s spare capacity then there was no reason to be alarmed.

 

“I am in the business of conventional. The way I see it is that if it is a causative factor in a rise in OPEC’s spare capacity then I say why not? What’s the harm? The International Energy Agency (IEA) cannot have it both ways. Before the shale debate began, the agency expressed alarm at the perceived lack of OPEC’s spare capacity. Now when there is a perception that our spare capacity would rise, they again see it as a problem,” he added.

 

El-Badri said OPEC members would, if required, take steps to ensure market balance and reasonable price levels for producers and consumers, and respond to developments that might place oil market stability in jeopardy. OPEC said its next meeting will convene in Vienna, Austria, on Dec 4, 2013. That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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© Gaurav Sharma 2013. OPEC Secretary General Abdalla Salem el-Badri speaks at the conclusion of the 163rd OPEC meeting of ministers © Gaurav Sharma, May 31, 2013.

Saudi oil minister & the Oilholic’s natter

Saudi Arabia’s oil minister Ali Al-Naimi said the global oil market remains well supplied, in response to a question from the Oilholic. Speaking here in Vienna, ahead of the closed session of oil ministers at the 163rd OPEC meeting, the kingpin said, “The supply-demand situation is balanced and the world oil market remains well supplied.”

Asked by a fellow scribe how he interpreted the current scenario. “Satisfactory” was the short response. Al-Naimi also said, “Enough has been said on shale. North American shale production adds to supply adequacy. Is it a bad thing? No. Does it enter into the geopolitical equation and hegemony? Yes of course. Geopolitics has evolved for decades along with the oil industry and will continue to. What’s new here?!” And that, dear readers, was that.

Despite being pressed for an answer several times, Al-Naimi declined to discuss the subject of choosing a successor to OPEC Secretary General Abdalla Salem El-Badri.

 

The Saudis are expected to battle it out with the Iranians for the largely symbolic role, but one that is nonetheless central to shaping OPEC policies and carries a lot of prestige. As in December, the Saudis are proposing Majid Munif, an economist and former representative to OPEC. Tehran wants its man Gholam-Hussein Nozari, a former Iranian oil minister, installed. Compromise candidate could be Iraq’s Thamir Ghadban.

 

The tussle between Iran and Saudi Arabia about the appointment has been simmering for a while and led to a stalemate in December. As a consequence, El-Badri’s term was extended. Anecdotal evidence suggests the Iranians, as usual, are being difficult.

Saudi Oil mins al-Naimi: Oil mrkt supply-demand situation ideal; equation is balanced & market remains well supplied twitter.com/The_Oilholic/s…
— Gaurav Sharma (@The_Oilholic) May 31, 2013

More so, Al-Naimi appeared to the Oilholic to be fairly relaxed about the Shale ruckus, but the Iranians are worried about perceived oversupply. (Only the Nigerians appear to be jumpier than them on the subject of shale). Iran's oil exports, it must be noted, are at their lowest since 2010 in wake sanction over its nuclear programme.

Away from the tussle, Abdel Bari Ali Al-Arousi, oil minister of Libya and alternate President of the OPEC Conference, said the world oil demand growth forecast for 2013 is expected to increase by 0.8 million barrels per day (bpd).

Total non-OPEC supply has seen a slight upward adjustment to 1.0 million bpd for the year. “This situation is likely to continue through the third and into the fourth quarters as we head into the driving season. Our focus will remain on doing all we can to provide stability in the market. This stability will benefit all stakeholders and contribute to growth in the world economy. However, as we have repeatedly said, this is not a job for OPEC alone. Every stakeholder has a part to play in achieving this,” he added.

Rounding off this post, on the subject of hegemony, it always makes the Oilholic smirk and has done so for years, that the moment the scribes are let in - the first minister they rush for (yours truly included) is the man from Saudi Arabia. That says something about hegemony within OPEC. That's all for the moment from Vienna folks, updates throughout the day and the weekend! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2013. Saudi Arabia’s oil minister Ali Al-Naimi speaking at the 163rd OPEC meeting of ministers © Gaurav Sharma, May 31, 2013.

Shale & the 163rd OPEC ministers’ summit

The Oilholic has exchanged the blustery wind and rain in London for the blustery wind and rain in Vienna ahead of 163rd OPEC meeting of ministers here on May 31, which half the world’s media and energy analysis community have already dubbed a ‘non-event’. The other half are about to! Industry commentators here and beyond think the 12 member group is going to hold its current production quota at just above 30 million barrels per day (bpd).

 

Even before yours truly boarded the flight from London Heathrow, a Rotterdam based contact in the spot trading world suggested one needn’t have bothered with the market having already factored-in an “as you were” stance by OPEC. This is borne out in further anecdotal evidence; the futures market on leading benchmarks has been bearish in the past 48 hours (not solely down to OPEC).

 

Accompanying overtones describing the meeting as a non-event is the sentiment that OPEC is being haunted by North America’s shale revolution. As if with perfect timing, the US EIA announced on Thursday that the country's crude-oil supplies rose 3 million barrels for the week ended May 24, to 397.6 million barrels; the highest level on record since it began collecting data in 1978.

 

Last week, the International Energy Agency (IEA) added its take on North American production scenarios by suggesting that demand for OPEC's oil is expected to plummet as production from the US (and Canada) increases by a fifth to 11.9 million bpd by 2018, compared with this year.

 

Additionally, Iraqi production is returning to health. So to put things into context, by 2020 the IEA expects Iraq's oil output to more than double to 6.1 million bpd and were this to happen, OPEC’s unofficial production could rise well above 36 million bpd. As a knee-jerk reaction, the cartel – according to the agency – would have to withhold up to 2.3 million bpd from the market by 2015 (with its spare capacity rising well above 7 million bpd).

 

Given all of this, you might be excused for thinking the global crude market was facing a supply glut and everything was gloomy from OPEC’s standpoint. Yet, the price of oil – Brent or OPEC’s own basket of crude(s) – is still above US$100 per barrel. That’s exactly where most in OPEC want it to be.

 

Arriving a day (or two) ahead of the meeting, 7 out of 12 OPEC ministers have told various media outlets that a US$100 price was acceptable, where it needs to be and “necessary” for investment.  These include senior government officials from Angola, Ecuador, Iraq, Kuwait, Saudi Arabia, UAE and Venezuela. A US$100 floor price is a uniting theme it seems and most have sounded intent on holding the current official production quota!

 

The conjecture is that as long that floor is maintained, the cartel won’t be cutting production. In fact, OPEC kingpin and Saudi Arabia’s oil minister Ali al-Naimi, who has been in Vienna since May 28, has said existing conditions represent the best environment possible for the market in the face of economic headwinds and that “demand is great.” Despite the best efforts of scribes, bloggers, wiremen and analysts collective, neither Iran nor Venezuela, both of whom are always pushing for cuts to boost the price, have uttered much in the past 24 hours.

 

In contrast, Abdul Kareem al-Luaibi, oil minister for Iraq, OPEC’s second-largest producer, said, “There is balance between demand and supply, and this is reflected on prices, they are stable. We don’t want any shock to the market, the stability of prices is important for the global economy.”

 

The Oilholic thinks the cartel will maintain status quo until the floor dips to US$80 per barrel, if it does. However, the unity will disappear the moment the oil price dips below US$99 with Venezuela and Iran being among the first to start clamouring for another production quota cut.

 

This brings us back to the hullabaloo about North American shale (and unconventional E&P) versus OPEC! The right wing commentators and the US media plus politicians of all stripes – some of whom of conveniently forget Canada’s part in the North American energy spectrum – make it sound as if OPEC, which still accounts for just over 40% of the world’s crude oil market, would suddenly become irrelevant overnight.

 

The IEA, as the Oilholic noted a few weeks ago, described it as nothing short of a paradigm shift in the context of the oil market, although in not these exact words. Then there is the dilemma of OPEC ministers – who are damned if they do and damned if they don’t. If an OPEC minister acknowledges the impact of North American shale, he is described in the media as one who is resigned to the cartel’s decline. Conversely, if an OPEC minister dismisses it, the rebuttal is that he’s doing so because he’s scared!

 

Here is an example from this afternoon, when Iraqi minister al-Luaibi was asked for a comment, he said, “The US shale oil production increase – although it has some impact, it's not a significant impact on oil production or exports, and as you all might notice OPEC countries are all producing more oil than the agreed quota ceiling.”

Now, instead of the Oilholic doing so, do your own research on how the quote has been reported stateside? It will vindicate the sentiment expressed in the previous paragraph. Yours truly is not belittling the shale revolution stateside – but how on earth can the current level of incremental production be maintained beyond the medium term is beyond common sense. So its worth getting excited about but not overexcited about it too! Furthermore, a bit of pragmatism is needed in this debate – one which the Oilholic saw in a brilliant article in the FT by Ajay Makan.

 

In the column, Makan notes how within OPEC there is divide between the relatively comfortable Gulf producers (for e.g. Saudi Arabia) and the rest (most notably Iran, Venezuela and African members). The Saudis have welcomed the impact of shale as they can afford the price falling below US$100 level but some of their peers in OPEC can’t. For some more than the others, “a reckoning appears inevitable, particularly if growth in demand slows,” writes Makan.

 

Then again, beyond supply scenarios, it is worth asking whose shale bonanza is it anyway? First and foremost it is, and as the Oilholic was discussing with Phil Flynn of Price Futures a couple of months ago, price positive for American consumers, followed by LNG importing Asian jurisdictions. While Indian and Chinese policymakers are hardly jumping for joy and will for the foreseeable future continue to rely on OPEC members (and Russia) for majority of their crude cravings, some in the US are already fretting about what US exports would mean for domestic prices!

 

A group – America’s Energy Advantage – backed by several prominent US industrial brands including Alcoa, Huntsman chemicals and Dow Chemical, has claimed that "exporting proceeds of shale (to be read LNG) carries with it the potential threat of damaging jobs and investment in the US manufacturing sector as rising exports will drive up the price of gas to the detriment of domestic industries."

 

Boone Pickens, in a brilliant riposte, has asked can the US do what it has been criticising OPEC for since the cartel's inception and restrict exports? The inimitable industry veteran has a point! That's all for the moment from Vienna folks! Keep reading, keep it 'crude'!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. OPEC logo on HQ exterior, Vienna, Austria © Gaurav Sharma.