That US oil production chart by the EIA

Market chatter over US oil production appears to be all the rage these days, with many forecasters predicting 2019 to be another record year for the Americans. Some are even predicting US production to be as high as 13.4 million barrels per day (bpd) in 2019. 

At the moment, its lurking around 12.3 million bpd according to the EIA. However, the chart below sums it up, and kinda explains why some commentators are so upbeat, given the trajectory of official data and related projections. Please click to enlarge chart. That's all for the moment folks, as the Oilholic is in Oslo, Norway for a conference. More from here shortly! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2019. Photo: US oil production and projection © US EIA, May 2019

Resisting $40/bbl, Russia & some ‘crude’ ratings

Following two successive week-on-week declines of 6% or over, last Friday’s close brought some respite for Brent oil futures, although the WTI front month contract continued to extend losses. In fact, the US benchmark has been ending each Friday since June 12 at a lower level compared to the week before (see graph, click to enlarge).

 

Will a $40-floor breach happen? Yes. Will oil stay there? No. That’s because market fundamentals haven’t materially altered. Oversupply and lacklustre demand levels are broadly where they were in June. We still have around 1.1 to 1.3 million barrels per day (bpd) of extra oil in the market; a range that’s held for much of 2015. Influences such as Iran’s possible addition to the global crude oil supply pool and China not buying as much have been known for some time.

The latest market commotion is sentiment driven, and it’s why the Oilholic noted in a recent Forbes column that 2016-17 futures appear to be undervalued. People seem to be making calls on where we might be tomorrow based on the kerfuffle we are seeing today!

Each set of dire data from China, inventory report from the Energy Information Administration (EIA), or a gentle nudge from some country or the other welcoming Iran back to the market (as Switzerland did last week) has a reactive tug at benchmarks. The Oilholic still believes Brent will gradually creep up to $60-plus come the end of the year, with supply corrections coming in to the equation over the remainder of this year.

Away from pricing, there is one piece of very interesting backdated data. According to the EIA, Russia’s oil and gas sector weathered both the sanctions as well as the crude price decline rather well.

For 2014, Russia was the world's largest producer of crude oil, including lease condensate, and the second-largest producer of dry natural gas after the US. Russia exported more than 4.7 million bpd of crude oil and lease condensate in 2014, the EIA concluded based on customs data. Most of the exports, or 98% if you prefer percentages, went to Asian and European importers.

Where Russian production level would be at the end of 2015 remains the biggest market riddle. Anecdotal and empirical evidence points to conducive internal taxation keeping the industry going. However, as takings from oil and gas production and exports, account for more than half of Russia's federal budget revenue – it is costing the Kremlin.

Finally, two ratings notes from Fitch over the past fortnight are worth mentioning. The agency has revised its outlook on BP's long-term Issuer Default Rating (IDR) to ‘Positive’ from ‘Negative’ and affirmed the IDR at 'A'.

The outlook revision follows BP's announcement that it has reached an agreement in principle to settle federal, state and local Deepwater Horizon claims for $18.7bn, payable over 18 years. “We believe the deal has significantly reduced the uncertainty around BP's overall payments arising from the accident and hence has considerably strengthened the company's credit profile,” Fitch said.

The agency added there was a real possibility for an upgrade to 'A+' in the next 12 to 18 months, depending on how things pan out and BP's upstream business profile does not show any significant signs of weakening, such as falling reserves or production.

Elsewhere, and unsurprisingly, Fitch downgraded the beleaguered Afren to ‘D’ following the management's announcement on July 31 that it had taken steps to put the company into administration. The company's senior secured rating has been affirmed at 'C', and the Recovery Rating (RR) revised to 'RR5' from 'RR6'.

As discussions with creditors aimed at recapitalising the company failed, the appointment of administrators was made with the consent of the company's secured creditors who saw it as an “important step in preserving value of Afren's subsidiaries”. It is probably the only “value” left after a sorry tale of largely self-inflicted woes. That’s all for the moment folks, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graph: Oil benchmark Friday closes, Jan 2 to Aug 14, 2015 © Gaurav Sharma, August 2015.

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

Speculators make the oil price belie market logic

The fickle crude oil market is yet again giving an indication about how divorced it is from macroeconomic fundamentals and why a concoction of confused geopolitics and canny speculation is behind the recent peaks and troughs. To give a bit of background – the WTI forward month futures contract surpassed the US$106 per barrel level last week; the highest it has been in 16 months. Concurrently, the spread between WTI and Brent crude narrowed to a near 33-month low of US$1.19 in intraday on July 11 [versus a high of US$29.70 in September 2011].

 

Less than a couple of weeks ago Goldman Sachs closed its trading recommendation to buy WTI and sell Brent. In a note to clients, the bank’s analysts said they expected the spread to narrow in the medium term as new pipelines help shift the Cushing, Oklahoma glut, a physical US crude oil delivery point down to the Houston trading hub, thus removing pressure from the WTI forward month futures contract to the waterborne Brent.

 

Goldman Sachs' analysts were by no means alone in their thinking. Such a viewpoint about the spread is shared by many on Wall Street, albeit in a nuanced sort of way. While Cushing's impact in narrowing the spread is a valid one, the response of the WTI to events elsewhere defies market logic.

 

Sadly Egypt is in turmoil, Syria is still burning, Libya’s problems persist and Iraq is not finding its feet as quick as outside-in observers would like it to. However, does this merit a WTI spike to record highs? The Oilholic says no! Agreed, that oil prices were also supported last week by US Federal Reserve Chairman Ben Bernanke's comments that economic stimulus measures were "still" necessary. But most of the upward price pressure is speculators' mischief - pure and simple.

 

Less than two months ago, we were being peddled with the argument that US shale was a game changer – not just by supply-side analysts, but by the IEA as well. So if that is the case, why are rational WTI traders spooked by fears of a wider conflict in the Middle East? Syria and Egypt do not even contribute meaningfully to the global oil market supply train, let alone to the North American market. Furthermore, China and India are both facing tough times if not a downturn.

 

And you know what, give this blogger a break if you really think the US demand for distillates rose so much in 10 days that it merited the WTI spiking by the amount that it has? Let's dissect the supply-side argument. Last week's EIA data showed that US oil stocks fell by about 10 million barrels for a second consecutive week. That marked a total stockpile decline of 20.2 million barrels in two weeks, the biggest since 1982.

 

However, that is still not enough to detract the value of net US inventories which are well above their five-year average. Furthermore, there is nothing to suggest thus far that the equation would alter for the remainder of 2013 with media outlets reporting the same. The latest one, from the BBC, based on IEA figures calmly declares the scare over 'peak oil' subsiding. US crude production rose 1.8% to 7.4 million barrels per day last week, the most since January 1992 and in fact on May 24, US supplies rose to 397.6 million, the highest inventory level since 1931!

 

But for all of that, somehow Bernanke's reassurances on a continuation of Federal stimulus, flare-ups in the Middle East [no longer a big deal from a US supply-side standpoint] and a temporary stockpile decline were enough for the latest spike. Why? Because it is a tried and tested way for those who trade in paper barrels to make money.

 

A very well connected analogy can be drawn between what's happening with the WTI and Brent futures' recent "past". Digging up the Brent data for the last 36 months, you will see mini pretexts akin to the ones we've seen in the last 10 days, being deployed by speculators to push to the futures contract ever higher; in some instances above $110 level by going long. They then rely on publicity hungry politicians to bemoan how consumers are feeling the pinch. Maybe an Ed Markey can come alone and raise the issue of releasing strategic petroleum reserves (SPRs) and put some downward pressure – especially now that he's in the US Senate.

 

Simultaneously, of course the high price starts hurting the economy as survey data factors in the drag of rising oil prices, usually within a three-month timeframe, and most notably on the input/output prices equation. The same speculators then go short, blaming an economic slowdown, some far-fetched reason of "uptick" in supply somewhere somehow and the Chinese not consuming as much as they should! And soon the price starts falling. This latest WTI spike is no different.

Neither the underlying macroeconomic fundamentals nor the supply-demand scenarios have altered significantly over the last two weeks. Even the pretexts used by speculators to make money haven't changed either. The Oilholic suspects a correction is round the corner and the benchmark is a short! (Click graph above to enlarge)

 

Away from crude pricing matters to some significant news for India and Indonesia. It seems both countries are reacting to curb fuel subsidies under plans revealed last month. The Indian government agreed to a new gas pricing formula which doubled domestic natural gas prices to $8.40/million British thermal units (mmbtu) from $4.20/mmbtu.

Meanwhile, the Indonesian government is working on plans to increase the price of petrol by 44% to Rupiah 6,500 ($2.50) per gallon and diesel by 22% to Rupiah 5,500. With the hand of both governments being forced by budgetary constraints, that's good economics but bad politics. In Asia, it's often the other way around, especially with general elections on the horizon - as is the case with both countries.

 

Elsewhere, yours truly recently had the chance to read a Moody's report on the outlook for the global integrated oil and gas industry. According to the ratings agency, the outlook will remain stable over the next 12 to 18 months, reflecting the likelihood of subdued earnings growth during this period.

Analyst Francois Lauras, who authored the report, said, "We expect the net income of the global oil and gas sector to fall within the stable range of minus 10% to 10% well into 2014 as robust oil prices and a slight pick-up in US natural gas prices help offset ongoing fragility in the refining segment." 

 

"Although oil prices may moderate, we expect demand growth in Asia and persistent geopolitical risk to keep prices at elevated levels," he added.

 

The agency anticipates that integrated oil companies will concentrate on reinvesting cash flows into their upstream activities, driven by "robust" oil prices, favourable long-term trends in energy consumption and the prospects of higher returns.

 

However, major projects are exerting pressure on operating and capital efficiency measures as they are often complex, highly capital intensive and have long lead times. In the near term, Moody's expects that industry players will continue to dispose of non-core, peripheral assets to complement operating cash flows and fund large capex programmes, as well as make dividend payouts without impairing their balance sheets.

 

Finally, the agency said it could change its outlook to negative if a substantial drop in oil prices were triggered by a further deterioration in the world economy. It would also consider changing its outlook to positive if its forecast for the sector's net income increased by more than 10% over the next 12-18 months.

Moody's has maintained the stable outlook since September 2011. In the meantime, whatever the macroeconomic climate might be, it hardly ever rains on the speculators' parade. That's all for the moment folks! Keep reading, keep it 'crude'!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Pump Jacks, Perryton, Texas, USA © Joel Sartore / National Geographic. Graph: WTI Crude Futures US$/barrel © BBC / DigitalLook.com

‘9-month’ high to a ‘9-month’ low? That's crude!

In early February, we were discussing the Brent forward month futures contract's rise to a nine-month high of US$119.17 per barrel. Fast forward to mid-April and here we are at a nine-month low of US$97.53 – that’s ‘crude’!

The Oilholic forecast a dip and so it has proved to be the case. The market mood is decidedly bearish with the IMF predicting sluggish global growth and all major industry bodies (OPEC, IEA, EIA) lowering their respective global oil demand forecasts.

OPEC and EIA demand forecasts were along predictable lines but from where yours truly read the IEA report, it appeared as if the agency reckons European demand in 2013 would be the lowest since the 1980s. Those who followed market hype and had net long positions may not be all that pleased, but a good few people in India are certainly happy according to Market Watch. As the price of gold – the other Indian addiction – has dipped along with that of crude, some in the subcontinent are enjoying a “respite” it seems. It won’t last forever, but there is no harm in short-term enjoyment.

While the Indians maybe enjoying the dip in crude price, the Iranians clearly aren’t. With Brent below US$100, the country’s oil minister Rostam Qasemi quipped, "An oil price below $100 is not reasonable for anyone." Especially you Sir! The Saudi soundbites suggest that they concur. So, is an OPEC production cut coming next month? Odds are certainly rising one would imagine.

Right now, as Stephen Schork, veteran analyst and editor of The Schork Report, notes: "Oil is in a continued a bear run, but there's still a considerable amount of length from a Wall Street standpoint, so it smells like more of a liquidation selloff."

By the way, it is worth pointing out that at various points during this and the past week, the front-month Brent futures was trading at a discount to the next month even after the May settlement expired on April 15th. The Oilholic counted at least four such instances over the stated period, so read what you will into the contango. Some say now would be a good time to bet on a rebound if you fancy a flutter and “the only way is up” club would certainly have you do that.

North Sea oil production is expected to fall by around 2% in May relative to this month’s production levels, but the Oilholic doubts if that would be enough on a standalone basis to pull the price back above US$100-mark if the macroclimate remains bleak.

Meanwhile, WTI is facing milder bear attacks relative to Brent, whose premium to its American cousin is now tantalisingly down to under US$11; a far cry from October 5, 2011 when it stood at US$26.75. It seems Price Futures Group analyst Phil Flynn’s prediction of a ‘meeting in the middle’ of both benchmarks – with Brent falling and WTI rising – looks to be ever closer.

Away from pricing, the EIA sees US oil production rising to 8 million barrels per day (bpd) and also that the state of Texas would still beat North Dakota in terms of oil production volumes, despite the latter's crude boom. As American companies contemplate a crude boom, one Russian firm – Lukoil could have worrying times ahead, according to Fitch Ratings.

In a note to clients earlier this month, the ratings agency noted that Lukoil’s recent acquisition of a minor Russian oil producer (Samara-Nafta, based in the Volga-Urals region with 2.5 million tons of annual oil production) appeared to be out of step with recent M&A activity, and may indicate that the company is struggling to sustain its domestic oil output.

Lukoil spent nearly US$7.3 billion on M&A between 2009 and 2012 and acquired large stakes in a number of upstream and downstream assets. However, a mere US$452 million of that was spent on Russian upstream acquisitions. But hear this – the Russian firm will pay US$2.05 billion to acquire Samara-Nafta! Unlike Rosneft and TNK-BP which the former has taken over, Lukoil has posted declines in Russian oil production every year since 2010.

“We therefore consider the Samara-Nafta acquisition as a sign that Lukoil is willing to engage in costly acquisitions to halt the fall in oil production...Its falling production in Russia results mainly from the depletion of the company's brownfields in Western Siberia and lower than-expected production potential of the Yuzhno Khylchuyu field in Timan-Pechora,” Fitch Ratings notes.

On a closing note, the Oilholic would like to share a brilliant article on the BBC's website touching on the fallacy of the good biofuels are supposed to do. Citing a Chatham House report, the Beeb notes that the UK's "irrational" use of biofuels will cost motorists around £460 million over the next 12 months. Furthermore, a growing reliance on sustainable liquid fuels will also increase food prices. That’s all for the moment folks. Until next time, keep reading, keep it crude! 

To follow The Oilholic on Twitter click here. 

To email: gaurav.sharma@oilholicssynonymous.com 

© Gaurav Sharma 2013. Photo: Oil Rig © Cairn Energy Plc.

EIA’s switch to Brent is telling

A decision by the US Energy Information Administration (EIA) this month has sent a lot of analysts and industry observers, including yours truly, crudely quipping “we told you so.” That decision is ditching the WTI and adopting Brent as its benchmark for oil forecasts as the EIA feels its domestic benchmark no longer reflects accurate oil prices.

Ok it didn't say so as such; but here is an in verbatim quote of what it did say: "This change was made to better reflect the price refineries pay for imported light, sweet crude oil and takes into account the divergence of WTI prices from those of globally traded benchmark crudes such as Brent."

Brent has traded at US$20 per barrel premium to WTI futures since October, and the premium has remained in double digits for huge chunks of the last four fiscal quarters while waterborne crudes such as the Louisiana Light Sweet have tracked Brent more closely.

In fact, the EIA clearly noted that WTI futures prices have lagged behind other benchmarks, as rising oil production in North Dakota and Texas pulled it away from benchmark cousins across the pond and north of the US border. The production rise, for lack of a better word, has quite simply 'overwhelmed' the pipelines and ancillary infrastructure needed to move the crude stuff from Cushing (Oklahoma), where the WTI benchmark price is set, to the Gulf of Mexico. This is gradually changing but not fast enough for the EIA.

The Oilholic feels it is prudent to mention that Brent is not trouble free either. Production in the British sector of the North Sea has been declining since the late 1990s to be honest. However the EIA, while acknowledging that Brent has its issues too, clearly feels retail prices for petrol, diesel and other distillates follow Brent more closely than WTI.

The move is a more than tacit acknowledgement that Brent is more reflective of global supply and demand permutations than its Texan cousin. The EIA’s move, telling as it is, should please the ICE the most. Its COO said as early as May 2010 that Brent was winning the battle of the indices. In the year to November, traders have piled on ICE Brent futures volumes which are up 12% in the year to date.

Furthermore, prior to the OPEC output decision in Vienna this week, both anecdotal and empirical evidence suggests hedge funds and 17 London-based money managers have increased their bets on Brent oil prices rising for much of November and early December. Can’t say for last week as yours truly has been away from London, however, as of November 27 the net long positions had risen to 108,112 contracts; a spike of 11k-plus.

You are welcome to draw your own conclusions. No one is suggesting any connection with what may or may not take place in Vienna on December 12 or EIA opting to use Brent for its forecasts. Perhaps such moves by money managers and hedge funds are just part of a switch from WTI to Brent ahead of the January re-balancing act. However, it is worth mentioning in the scheme of things.

In other noteworthy news, Stephen Harper’s government in Canada has finally approved the acquisition of Nexen by China’s CNOOC following a review which began on July 23. Calgary, Alberta-headquartered Nexen had 900 million barrels of oil equivalent net proven reserves (92% of which is oil with nearly 50% of the assets developed) at its last update on December 31, 2011. The company has strategic holdings in the North Sea, so the decision does have implications for the UK as well.

CNOOC’s bid raised pretty fierce emotions in Canada; a country which by and large welcomes foreign direct investment. It has also been largely welcoming of Asian national oil companies from India to South Korea. The Oilholic feels the Harper administration’s decision is a win for the pragmatists in Ottawa. In light of the announcement, ratings agency Moody's has said it will review Nexen's Baa3 senior unsecured rating and Ba1 subordinated rating for a possible upgrade.

Meanwhile, minor pandemonium has broken out in Brazil’s legislative circles as president Dilma Rousseff vetoed part of a domestic law that was aimed at sharing oil royalties across the country's 26 states. Brazil’s education ministry felt 100% of the profits from new ultradeepwater oil concessions should be used to improve education throughout the country.

But Rio de Janeiro governor Sergio Cabral, who gets a windfall from offshore prospection, warned the measure to spread oil wealth across the country could bankrupt his state ahead of the 2014 soccer world cup and the 2016 summer Olympic games. So Rousseff favoured the latter and vetoed a part of the legislation which would have affected existing oil concessions. To please those advocating a more even spread of oil wealth in Brazil, she retained a clause spreading wealth from the “yet-to-be-explored oilfields” which are still to be auctioned.

Brazil's main oil-producing states have threatened legal action. It is a very complex situation and a new structure for distributing royalties has to be in place by January 2013 in order for auctions of fresh explorations blocks to go ahead. This story has some way to go before it ends and the end won’t be pretty for some. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Pipeline, Brooks Range, Alaska, USA © Michael S. Quinton/National Geographic.

Hawaii’s crude reality: Being a petrohead costs!

In a break from the ‘crude’ norm for visits to the USA, the Oilholic packed his bags from California and headed deep out to the Pacific and say ‘Aloha’ to newest and 50th United State of Hawaii. It’s good to be here in the Kona district of the Big Island and realise that Tokyo is a lot closer than London.

It is interesting to note that Hawaii is the only US state still retaining the Union Jack in its flag and insignia. The whole flag itself is a deliberate hybrid symbol of British and American historic ties to Hawaii and traces its origins to Captain John Vancouver – the British Naval officer after whom the US and Canadian cities of Vancouver and Alaska’s Mount Vancouver are named.

What’s not good being here is realising that a 1.3 million plus residents of these northernmost isles in Polynesia pay the most for their energy and electricity needs from amongst their fellow citizens in the US. It is easy to see why, as part dictated by location constraints Hawaii presently generates over 75% of its electricity by burning Petroleum.

Giving the geography and physical challenges, most of the crude oil is shipped either from Alaska and California or overseas. Furthermore, the Islands have no pipelines as building these is not possible owing to volcanic and seismic activity. Here’s a view of one active crater – the Halema’uma’u in Kilauea Caldera (see above right). You can actually smell the sulphur dioxide while there as the Oilholic was earlier today. In fact the entire archipelago was created courtesy of volcanic eruptions millions of years ago. The Big Island’s landmass of five plates is created out of Mauna Kea (dormant) and Mauna Loa (partly active) and the island is technically growing at moment as Kilaueu still spews lava which cools and forms land.

So both crude and distillates have to be moved by oil tankers between the islands or tanker lorries on an intra-island basis. The latter  creates regional pricing disparities. For instance in Hilo, the commercial heart of the Big Island and where the tanker docking stations are, gasoline is cheaper than Kona by almost 40-50 cents per gallon. The latter receives its distillates by road once tankers have docked at Hilo.

The state has two refineries both at Kapolei on the island of O‘ahu 20 miles west of capital Honolulu – one apiece owned by Tesoro and Chevron. The bigger of the two has a 93,700 barrels per day (bpd) and is owned by Tesoro; the recent buyer of BP’s Carson facility. However in January Tesoro put its Hawaiian asset up for sale.

Tesoro, which bought the refinery for US$275 million from BHP Petroleum Americas in 1998, said it no longer fitted with its strategic focus on the US Midcontinent and West Cost. The company expects the sale to be completed by the end of the year. Its Hawaiian retail operations, which include 32 gas stations, will also be part of the deal. Chevron operates Kapolei’s other refinery with a 54,000 bpd capacity. Between the two, there is enough capacity to meet Hawaii’s guzzling needs and the pressures imposed by US forces operations in the area.

In this serene paradise with volcanic activity and ample tidal movement, power generation from tidal and geothermal is not inconceivable and facilities do exist. In fact, for the remaining 25% of its energy mix, the state is one of eight US states with geothermal power generation and ranks third among them. Additionally, solar photovoltaic (PV) capacity increased by 150% in 2011, making Hawaii the 11th biggest US state for PV capacity. However, it is not nearly enough.

One simple solution that is being attempted is natural gas – something which local officials confirmed to the Oilholic. The EIA has also noted Hawaii’s moves in this direction. Oddly enough, while Hawaii hardly uses much natural gas, it is one of a handful of US states which actually produces synthetic natural gas. Switching from petroleum-based power generation to natural gas for much of Hawaii’s power generation could lower the state’s power bills considerably as the massive disconnect between US natural gas and crude oil prices looks set to continue.

Strong ‘gassy’ moves are afoot and anecdotal evidence here suggests feelers are being sent out to Canada, among others. In August, Hawaii Gas applied for a permit with the Federal Government to ship LNG to Hawaii from the West Coast. While the deliveries will commence later this year, arriving volumes of LNG would be small in the first phase of the project, according to Hawaii Gas. At least it is a start and the State House Bill 1464 now requires public utilities to provide 25% of net electricity sales from renewable sources by December 31, 2020 and 40% of net electricity sales from renewables by December 31, 2030.

That’s all for the moment folks as the Oilholic needs to explore the Big Island further via the old fashioned way which requires no crude or distillates – its the trusty old bicycle! Going back to history, it was Captain James Cook and not Vancouver who located these isles for the Western World in 1778. Regrettably, he got cooked following fracas with the locals in 1779 and peace was not made between Brits and locals until Vancouver returned years later.

Moving away from history, yours truly leaves you with a peaceful view of Punaluʻu or the Black Sand beach (see above left)! It is what nature magnificently created when fast flowing molten lava rapidly cooled and reached the Pacific Ocean. According to a US Park Ranger, the beach’s black sand is made of basalt with a high carbon content. It is a sight to behold and the Oilholic is truly beholden! On a visit there, you have a 99.99% chance of spotting the endangered Hawksbill and Green turtles lounging on the black sand. For once, yours truly is glad there are no bloody pipelines in the area blotting the landscape. More from Hawaii later - keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Halema’uma’u, Kilauea Caldera. Photo 2: Punaluʻu - the Black Sand beach, Hawaii, USA © Gaurav Sharma 2012.

Delhi’s traffic jams, officials & other crude matters

Last few days here have involved getting some really interesting intelligence from selected Indian ministries on investment by the country’s NOCs, India’s possible action against Iranian crude imports, rising consumption patterns and a host of other matters. However, to get to the said officials during rush hour, you have to navigate through one of the worst traffic in any Asian capital. Furthermore, rush hour or no rush hour, it seems Delhi’s roads are constantly cramped.

It takes on average an hour to drive 10 miles, more if you happen to be among those on the road during rush hour. It often pains to see some of the fastest cars on the planet meant to bring the thrill of acceleration to the Indian driver’s foot pedal, doing 15 mph on the Capital’s streets. They say Bangkok has Asia’s worst traffic jams – the Oilholic thinks ‘they’ have not been to Delhi.

Away from the jams, chats with officials threw up some interesting stuff. India currently permits 100% investment by foreign players only in upstream projects. However, the government is putting through legislation which would raise the investment ceiling for other components of the oil & gas business including raising investment cap in gas pipeline infrastructure to 100 per cent.

What India does, matters both to it as well as the wider oil & gas community. The country has some 14 NOCs, with four of them in the Fortune 500. As the Oilholic noted at the 20th World Petroleum Congress, over a period of the last 12 months, Indian NOCs have invested in admirably strategic terms but overseas forays have also seen them in Syria and Sudan which is politically unpalatable for some but perhaps ‘fair game’ for India in its quest for security of supply. It also imports crude from Iran. Together with China, Indian crude consumption heavily influences global consumption patterns.

US EIA figures suggest Indian crude consumption came in at 300,800 barrels per day (bpd) in 2009 while local feedback dating back to 2010 suggests this rose to 311,000 bpd by 2010. Being a massive net importer – sentiment goes right out of the window whether it comes to dealing with Iran or Sudan, and India's NOCs are in 20 international jurisdictions.

Over days of deliberations with umpteen Indian officials, not many, in fact any were keen on joining the European oil embargo on Iran. However, some Indian scribes known to the Oilholic have suggested that in the event of rising pressure, once assurances over sources of alternative supply had been met, the government would turn away from Iran. In the event of financial sanctions, it is in any case becoming increasingly difficult for Indian NOCs to route payments for crude oil to Iran.

No comment was available on the situation in Sudan or for any action on Syria. In case of the latter, many here are secretly hoping for a Russian veto at the UN to prevent any further action against the Assad administration but that view is not universal. Speaking of Sudan, the breakaway South Sudan shut its oil production on Sunday following a row with Sudan. It is a major concern for India’s ONGC Videsh Ltd (OVL) – which has the most exposure of all Indian companies in Sudan. Oil production makes up 98% of newly independent South Sudan's economy and OVL has seen its operations split between North and South Sudan.

Amid rising tension, the real headache for OVL, its Indian peers and Chinese majors is that while South Sudan has most of the crude oil reserves, North Sudan has refineries and port facilities from which exports take place to countries like India and China. It’s no surprise that the latest row is over export fees. If the dispute worsens, Indian analysts, oil companies and the UN Secretary General Ban Ki-moon are near unanimous in their fear that it could become a major threat to stability in the region. The Oilholic notes that while all three have very different reasons for voicing their fears – it is a clear and present danger which could flare up anytime unless sense prevails within the next four weeks.

South Sudan's oil minister Stephen Dhieu Dau told Reuters on Sunday that all production in his landlocked country had been halted and that no oil was now flowing through Sudan. "Oil production will restart when we have a comprehensive agreement and all the deals are signed," he added. Earlier on January 20th, Sudan seized tankers carrying South Sudanese oil, supposedly in lieu of unpaid transit fees. On Saturday, Sudan said it would release the ships as a “goodwill gesture” but South Sudan said this did not go far enough.

UN Secretary General Ban accused the leaders of Sudan and South Sudan of lacking "political will" and specifically urged Sudanese president Omar Al-Bashir to "fully co-operate with the United Nations". Doubtless he’ll respond to it just as he did to the issuance of his arrest warrant by the International Court of Justice in 2009! The world is watching nervously, as is India for its own crude reasons.

On the pricing front, Brent and WTI closed on Monday at US$110.98 and US$98.95 a barrel respectively, with decidedly bearish trends lurking around based on renewed fears of a chaotic default in Greece and EU leaders’ inability to reach a consensus. Unsurprisingly the Euro also lost ground to the US dollar fetching US$1.31 per Euro.

Jack Pollard, analyst at Sucden Financial, says the fear that CDS could be triggered in a hard Greek default could look ominous for crude prices, especially in terms of speculative positions. “Continued Iran tensions should help to maintain the recent tight range, with a breakout only likely when there is a material change in dynamics. Whether Iran or Greece produces this (change) remains to be seen,” he adds.

Last but not the least, reports from Belize – the only English-speaking Central American nation – suggest the country has struck black gold with its very first drill at the onshore Stann Creek prospect currently being handled by Texan firm Treaty Energy. Abuzz with excitement, both the government and Treaty believe the Stann Creek prospect has yet more surprises to offer with two more exploratory wells on the cards fairly soon pending permit requests. That’s all for the moment folks, keep reading keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Glimpses of Delhi's mega traffic Jams © Gaurav Sharma 2012.

Crude markets & the Eurozone mess

The Eurozone sad show continues alternating from a Greek tragedy to an Italian fiasco and woes continue to hit market sentiment; contagion is now – not entirely unexpectedly – seen spreading to Italy with the country’s benchmark debt notes rates rising above the 7% mark at one point deemed ‘unsustainable’ by most economists. Inevitably, both crude benchmarks took a plastering in intraday trading earlier in the week with WTI plummeting below US$96 and Brent sliding below US$113. Let’s face it; the prospect of having to bailout Italy – the Eurozone’s third largest economy – is unpalatable.

The US EIA weekly report which indicated a draw of 1.37 million barrels of crude oil, against a forecast of a 400,000 build provided respite, and things have become calmer over the last 24 hours. Jack Pollard, analyst at Sucden Financial Research, noted on Thursday that crude prices gathered some modest upside momentum to recover some of Wednesday’s losses as equities pared losses and Italian debt yields come off their record highs.

“One important factor for crude remains the Iranian situation with Western diplomats adopting a decidedly more hard-line approach to their rhetoric. For example, the French Foreign Minister has said the country is prepared to implement ‘unprecedented sanctions’ on Iran whilst William Hague, British Foreign Secretary, has said ‘no option is off the table’. Should the geopolitical situation deteriorate, the potential for supply disruptions from OPEC’s second largest producer could provide some support to crude prices,” Pollard notes.

From a Brent standpoint, barring a massive deterioration of the Iranian scenario, the ICE Brent forward curve should flatten in the next few months, mainly down to incremental supply of light sweet crude from Libya, end of refinery maintenance periods in Europe and inventories not being tight.

In an investment note to clients, on October 20th, Société Générale CIB analyst Rémy Penin recommended selling the ICE Brent Jan-12 contract and simultaneously buying the Mar-12 contract with an indicative bid @ +US$1.5/barrel. (Stop-loss level: if spread between Jan-12 and Mar-12 contracts rises to +US$2.5/barrel. Take-profit level: if spread drops to 0.)

The Oilholic finds himself in agreement with Penin even though geopolitical risks starting with Iran, followed by perennial tensions in Nigeria, and production cuts in Iran and Yemen persist. But don’t they always? Many analysts, for instance at Commerzbank, said in notes to clients issued on Tuesday that the geopolitical climate justifies a certain risk premium in the crude price.

But Penin notes, rather dryly, if the Oilholic may add: “All these factors have always been like a Damocles sword over oil markets. And current disruptions in Nigeria, Yemen and Iraq are already factored in current prices. If tensions ease, the still strong backwardation should as well.”

Additionally, on November 1st, his colleagues across the pond noted that over the past 20 years, when the NYMEX WTI forward curve has flipped from contango into backwardation, it has provided a strong buy signal. Société Générale CIB, along with three others (and counting) City trading houses recommend buying WTI on dips, as the Oilholic is reliably informed, for the conjecture is not without basis.

There is a caveat though. Société Générale CIB veteran analyst Mike Wittner notes that it is important to take into account the fact that crude oil stocks at Cushing, Oklahoma, consist not only of sweet WTI-quality grades but also of sour grades. “Most market participants, including us, do not know the exact breakdown between sour and sweet crudes at Cushing, but the recent move into backwardation suggests that there is little sweet WTI-quality crude left,” he adds.

Société Générale CIB analysts believe market participants who are reluctant to go outright long WTI in the current highly uncertain macroeconomic environment may wish to consider using the WTI sweet spot signal to go long WTI against Brent. Any widening of the forward-month Brent-WTI spread towards US$20 represents a trading opportunity, as the spread should narrow to at least US$15 and possibly to as low as US$10 before year-end, on the apparent shortage of WTI and increasing supply of Atlantic Basin waterborne sweet crude.

© Gaurav Sharma 2011. Photo: Trans Alaska Pipeline © Michael S. Quinton / National Geographic

Eni’s Rating Downgrade & Other News

Moody's Investors Service lowered the long-term senior unsecured ratings of Eni S.p.A. (Eni) and its guaranteed subsidiaries to Aa3 from Aa2 and the senior unsecured rating of Eni USA Inc. to A1 from Aa3. In a note on Monday, it said the outlook for all ratings is stable.

Eni qualifies as a Government-Related Issuer (GRI) under Moody's methodology for such entities, given its 30.3% direct and indirect ownership by the Italian state. The downgrade reflects Moody's expectation that deleveraging process initiated by Eni management and recovery in the group's credit metrics will be gradual and unlikely to restore sufficient headroom to help underpin its business case analysis within the Aa range.

In other news, the U.S. EIA has cut its forecast for global oil demand in light of lower forecasts for global growth. EIA now expects global oil consumption to rise by 1.4 million barrels per day in 2011 against last month's projection of 1.5 million barrels. The consumption growth forecast for 2010 was unchanged at 1.6 million barrels per day.

On the pricing front, the EIA expects spot West Texas Intermediate crude prices to average US$77 a barrel in Q4 2010, down from its previous forecast of US$81. It added that crude prices are likely to climb to US$84 by the end of 2011.

Meanwhile, as you know, BP published its internal report into the Deepwater Horizon rig explosion in the Gulf of Mexico and the resultant oil spill last week. Given the ol’ day job of mine, I wanted to read it cover to cover – all 193 pages of it – before blogging about it. Having finally read it, goes without saying the oil giant is stressing on the fact that a "sequence" of failures caused the tragedy for which a "number of parties" were responsible. (To be read as Transocean and Halliburton)

In the report, conducted by BP's head of safety Mark Bly, the oil giant noted eight key failures that collectively led to the explosion. Most notably, BP said that both its staff as well and Transocean staff interpreted a safety test reading incorrectly "over a 40-minute period" which should have flagged up risks of a blowout and action could have been taken on the influx of hydrocarbons into the well.

BP was also critical of the cementing of the well - carried out by Halliburton - and the well’s blowout preventer. The report also notes that improved engineering rigour, cement testing and communication of risk by Halliburton could have identified flaws in cement design and testing, quality assurance and risk assessment.

It added that a Transocean rig crew and a team working for Halliburton Sperry Sun may have been distracted by "end-of-well activities" and important monitoring was not carried out for more than seven hours as a consequence.

Furthermore, BP said that there were "no indications" Transocean had tested intervention systems at the surface as was required by its company policy before they were deployed on the well. Crew may have had more time to respond before the explosion if they had diverted escaping fluids overboard, the report added.

BP’s outgoing Chief Executive Tony Hayward said, “To put it simply, there was a bad cement job and a failure of the shoe track barrier at the bottom of the well, which let hydrocarbons from the reservoir into the production casing. The negative pressure test was accepted when it should not have been, there were failures in well control procedures and in the blowout preventer; and the rig's fire and gas system did not prevent ignition.”

So there we have it – the oil giant is not absolving itself of the blame, but rather spreading it around. It came as no major surprise that both Halliburton and Transocean criticised and dismissed the report - though not necessarily in that order. The story is unlikely to go away as a national commission is expected to submit a report to President Barack Obama by mid-January 2011 followed by a Congressional investigation. The U.S. Justice department may yet step in as well if evidence of criminal wrongdoing of some sort emerges.

Away from the BP spill saga, French energy giant Total said last week that it could sell its 480 petrol stations in the UK as part of a strategic review of its British downstream operations as it refocuses on its core upstream strength and well something had to give.

© Gaurav Sharma 2010. Photo: US Oil rig © Rich Reid / National Geographic Society

From a Sobering August to Sept's Crude Forecast!

August has been a sobering month of sorts for the crude market. Overall, the average drop in WTI crude for the month was well above 8% and the premium between Brent crude and WTI crude futures contracts averaged about US$2. The market perhaps needed a tempering of expectations; poor economic data and fears of a double-dip recession did just that.

Even healthy US jobs data released last week could not stem the decline; though prices did recover by about 2% towards the end of last week. On Friday, the crude contract for October delivery lost 0.6% or US$0.41 to $74.60 a barrel on NYMEX. This is by no means a full blown slump (yet!) given that last week’s US EIA report was bearish for crude. It suggests that stocks built-up by 3.4 million barrels, a figure which was above market consensus but less than that published by the API. This is reflected in the current level of crude oil prices.

Looking specifically at ICE Brent crude oil futures, technical analysts remain mildly bullish in general predicting a pause and then a recovery over the next three weeks. In an investment note discussing the ICE Brent crude oil contract for October delivery, Société Générale CIB commodities technical analyst Stephanie Aymés notes that at first the market should drift lower but US$74.40/73.90 will hold and the recovery will resume to 77.20 and 77.70/78.00 or even 78.80 (Click chart above).

On the NYMEX WTI forward month futures contract, Aymés also sees a recovery. “73.40 more importantly 72.60 will hold, a further recovery will develop to 75.55/90 and 76.45 or even 77.05/77.25,” she notes. By and large, technical charts from Société Générale or elsewhere are not terribly exciting at the moment with the price still generally trading pretty much within the US$70-80 range.

Elsewhere in the crude world, here is a brilliant article from BBC reporter Konstantin Rozhnov on how Russia’s recently announced privatisation drive is sparking fears of a return to the Yeltsin era sale of assets.

On a crudely related note, after a series of delays, Brazil’s Petrobras finally unveiled its plans to sell up to US$64.5 billion of new common and preference stock in one of the largest public share offerings in the world.

A company spokeswoman said on Friday that the price of new shares would be announced on September 23rd. The IPO could well be expanded from US$64.5 billion to US$74.7 billion subject to demand; though initially Petrobras would issue 2.17 billion common shares and 1.58 billion preferred shares. The share capital will finance development of offshore drilling in the country’s territorial waters.

Lastly, the US Navy and BP said late on Sunday that the Macondo well which spilled over 200 million gallons of oil into the Gulf of Mexico poses no further risk to the environment. Admiral Thad Allen, a US official leading the government’s efforts, made the announcement after engineers replaced a damaged valve on the sea bed.

Concurrently, The Sunday Times reported that BP had raised the target for its asset sales from US$30 billion to US$ 40 billion to cover the rising clean-up cost of the Gulf of Mexico oil spill. The paper, citing unnamed sources, also claimed that BP was revisiting the idea of selling a stake in its Alaskan assets.

© Gaurav Sharma 2010. Graphics © SGCIB / CQG Inc. Photo: Alaska, US © Kenneth Garrett / National Geographic Society

Crude Price Seen Factoring In Survey Data

Crude oil futures rose over 3% on average in week over week terms and for a change that is not chiefly down to a stand-alone argument that black gold is higher because the commodity is cheaper in U.S. Dollar terms.

To be fair, the 5-day cycle I examine began with the usual market conjecture over the position of the dollar. However, survey evidence indicates that manufacturing activity is picking-up. This morning, the Philadelphia Federal Reserve said its index of manufacturing activity rose to 17.6 in February from 15.2 in January; a sixth consecutive monthly rise. Across the pond, UK’s Society of Motor Manufacturers and Traders (SMMT) reported its biggest monthly increase in auto production in year over year terms since May 1976. It said 101,190 cars were produced in January, up from 85,316 in December.

Trawling back the economic calendar, manufacturing purchasing managers’ indices (PMI) on either side of the pond are positive, especially the Eurozone PMI released on February 1st. It came in at 52.4 for January, versus 51.6 at the end of 2009; the highest level in two years. Admittedly, difference between the zone’s healthiest and weakest economies is widening, but overall picture is improving. Furthermore, Indian and Chinese economic activity remains buoyant. Yet, market commentators correctly opine that global economy is not quite out of the woods yet. From a British standpoint, Kate Barker, a member of the Bank of England’s rate setting monetary policy committee, summed up the City of London’s fears best in an interview with the Belfast Newsletter.

“Do I think that it’s possible we (in the UK) will have another quarter of negative production at some point? I do think it’s possible and I think the recovery will be quite hesitant but I wouldn’t necessarily describe that as a double dip,” Baker said.

That argument could be used for a number of OECD economies which have emerged from the recession over the last two quarters. Not to mention that Spain is yet to come out of a recession. David Moore, Chief Commodities Strategist at Commonwealth Bank of Australia, sees a gradual rebound in economic activity as the recovery takes hold which would then reflect in crude oil consumption patterns supporting crude prices to the upside.

Energy markets have always had to contend with volatility and that will not change. As Greece’s debt weighs on the Euro, the Dollar is seen strengthening which would in turn have a bearing upon crude prices. Moore opines that had the Dollar not strengthened against the Euro, crude oil price seen this week would have been even higher than current levels.

U.S. Energy Information Administration (EIA) and American Petroleum Institute (API) data did not really temper this morning’s climb. A few hours ago, the EIA said U.S. crude inventories rose by 3.1 million barrels over the week ending February 12, while the API said late on Wednesday that crude supplies declined by 63,000 barrels last week. However, it also reported that gasoline stocks rose by 1.4 million barrels over the corresponding period.

Following the EIA data, NYMEX crude contract for March settlement stood at $78.15 up 84 cents or 1.09% at 17:00 GMT, trading in the circa of 76.32 to 78.71. Across the pond, London Brent Crude’s April settlement contract stood at $76.03 up 66 cents or 0.87% trading in the circa of $75.27 to $77.65. The Dollar’s strength remains a factor, but there are others to consider too.

© Gaurav Sharma 2010. Photo Courtesy © BP Plc