US prices at the pump & that export ban

Each time the Oilholic is Stateside, one feels obliged to flag up petrol prices at the pump, often a cause of complaint from US motorists, spooking presidents to seek a release of the Strategic Petroleum Reserves.

 

So here's the latest price snap (left) from a petrol station at Mission San Jose, California captured by yours truly while in the South San Francisco Bay. And the price is per gallon, not litres, a pricing level that drivers in Europe can only dream of. With the shale bonanza, chatter is growing that the US should end its ban on crude oil exports. The ban was instituted in wake of the 1973 OPEC oil embargo and has been a taboo subject ever since.

However, the prices you see above are the very reason a lifting of that ban is unlikely to end over the medium term. Argument used locally is the same as the one mooted for the unsuccessful bid to prevent US natural gas exports – i.e. end consumers would take a hit. While in the case of natural gas, industry lobby groups were the ones who complained the loudest, in the case of crude oil, consumer lobby groups are likely to lead the fight.

That's hardly an edifying prospect for any senator or congressman debating the issue, especially in an election cycle which rears its head every two years in the US with never ending politicking. Just ask 'now Senator' and Democrat Ed Markey! But to quote someone else for a change – Senate Foreign Relations Committee Chairman Robert Menendez, another Democrat, has often quipped that lifting the ban would benefit only major oil companies and could end up "hurting US drivers and households" in the long run with higher gasoline prices.

 

Not all Democrats or US politicians are opposed to the lifting of a ban though. Senate Energy and Natural Resources Chairman Mary Landrieu and Republican Senator Lisa Murkowski support a lifting of the ban. Both recently called on the EIA to conduct a detailed study of the effects of crude oil exports.

 

"This is a complex puzzle that is best solved with dynamic and ongoing analysis of the full picture, rather than a static study of a snapshot in time," they wrote in an April 11 letter to EIA Administrator Adam Sieminski.

 

However, in all honesty, the Oilholic expects little movement in this front. Read up on past hysteria over the slightest upward flicker at US pumps and you'll get your answer why. One must be thankful that the debate is at least taking place. That too, only because US crude oil inventory books keep breaking records.

Earlier this month, the market was informed that US inventories had climbed to their highest level since May 1931. So what are we looking at here –  stockpiles at Cushing, Oklahoma, the country's most voluminous oil-storage hub and the delivery point for New York futures, rose by 202,000 barrels in the week ended April 25.

 

The news trigged the biggest WTI futures loss since November last year as a Bloomberg News survey estimated the net stockpile level to be close to 399.9 million last week. That said, nothing stops the likes of Markey from blowing hot air or speculators from netting their pound of flesh.

 

According to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) on Friday, traders and speculators increased their overall bullish bets in crude oil futures for a fifth straight week, all the way to the highest level since March 4 last week.

 

The non-commercial contracts of crude oil futures, primarily traded by large speculators and hedge funds, totalled a net position of +410,125 contracts for the week ended April 22. The previous week had seen a total of +409,551 net contracts. While this represents only a minor change of just +574 contracts for the week, it is still in throes of a bull run. That's all from San Francisco folks! Keep reading, keep it 'crude'!

 

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© Gaurav Sharma 2014. Photo: Gasoline prices at a station in Mission San Jose, California, USA © Gaurav Sharma, April, 2014.

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

Crude thoughts, an event, few articles & a lecture!

Brent’s decline continues with the forward month futures contract now well and truly below the US$110 per barrel level. In fact, when the Oilholic last checked, a price of US$108.41 was flashing on the ticker. Given that over the past seven days – OPEC, EIA and IEA – have all come out with bearish reports, the current price level should hardly be a surprise.

 

Additionally, both OPEC and IEA appear to be in broad agreement that overall concerns about economic growth in the US and the Eurozone will continue to persist over the short term at the very least. As if that wasn’t enough, the US dollar has reached a seven-month high against a basket of currencies, not least the pound sterling!

 

At such points in recent trading history, geopolitics always lends support to the oil price. Yet further evidence is emerging about the oil & gas community largely regarding the risk premium to be neutral, a theme which this blogger has consistently stressed on since September last year. Many delegates at the recently concluded International Petroleum Week (IP Week) in London, a signature European event, expressed pretty much the same sentiments.

 

Rather than relying on the Oilholic’s anecdotal evidence, here’s an observation from Société Générale analyst Michael Wittner who wrote in an investment note that, “On the geopolitical front, there seemed to be a sort of fatigue (at the IP Week), if not boredom, with the various issues and countries. In addition to Syria and Iran, there was talk about risks in Iraq and Nigeria, and even Chinese-Japanese tensions. Given recent events in Algeria, Egypt, and Mali, we were surprised at how little concern there was about North Africa.”

 

“All agreed that the geopolitical elephant in the room was still Iran, but even here, the fatigue was evident. People were well aware of Israel’s late spring/early summer “deadline”, but they were not excited about it. Some pointed to higher Saudi spare capacity (after recent cuts) and much higher pipeline capacity that could be used to avoid the Straits of Hormuz. Others simply thought that, posturing aside, there was little real appetite for a war against Iran, and that an Iranian bomb was inevitable,” he wrote further. Need we say more?

 

So in summation – tepid crude demand plus fatigued risk premium equals to no short term hope for the bulls! But at least there’s hope for the Brent-WTI spread to narrow, with the former falling and the latter rising on the back of the supply glut at Cushing, Oklahoma showing signs of abating.

 

Away from pricing matters, given that yours truly has been travelling a lot within good old England these past few weeks, there has also been plenty of time to do some reading up on trains! Four interesting articles came up while the Oilholic was experiencing the joys (or otherwise) of British railways.

 

First off, the Wall Street Journal’s Jerry A. Dicolo screams: “Brent barrels to prominence: European oil benchmark poised to overtake WTI as a global gauge.” The Oilholic has some news for the WSJ – Er…Brent is not ‘poised’ to overtake WTI as a global gauge, it has already overtaken it in terms of market sentiment! This blog first mulled the subject as far back as May 2010! Since then, even the EIA has decided to adopt Brent as a benchmark that’s more reflective of global conditions.

 

The second interesting piece of reading material yours truly encountered was a republished Bloomberg wire copy that carried feedback from an Indian refiner. In it, he suggested that the country’s refiners may be forced to halt purchases of Iranian crude as local insurers refuse to cover the risks for any Indian refinery using the Islamic Republic’s oil.

 

Bloomberg cites a certain P.P. Upadhya, Managing Director of the Mangalore Refinery in Southern India as having said, “There’s a problem with getting insurance for refineries processing Iranian oil. If there’s no clarity very soon, we all have to stop buying from Iran or risk operating the refineries without insurance.” Looks like the squeeze on Iran is going into overdrive!

 

Moving on to the third article, here is The Economist's sound take on the late Hugo Chavez’s rotten economic legacy. And finally, a Reuters’ exclusive would have you believe we Brits are planning to bid for US gas to be imported to our shores.

 

An abundance of gas, courtesy of the country’s shale bonanza has certainly lent credence to the US’ gas exporting potential. One would think if the US were to export gas, it would one fine day make its way to the UK. However, a “source” spoken to by Reuters seems to suggest that day is not that far away.

 

Speaking of shale, the Oilholic had the pleasure of listening to a brilliant lecture on the subject from Prof. Paul Stevens, the veteran energy economist and Chatham House fellow. Delivering the Institution of Engineering and Technology’s Clerk Maxwell Lecture for 2013, Prof. Stevens set about exploding the myth of a shale gas revolution taking place in Europe anytime soon.

 

He joked that North Dakota might become the next member of OPEC, but one thing is for certain Poland and other European shale enthusiasts are not getting there any time soon. Apart from the usual concerns, often mulled over by the Oilholic, such as jurisdictional prospection moratoriums and population density, pipeline access, environmental regulations etc. being very different between the US and Europe, the good professor pointed out a very crucial point.

 

“Shale rock formation in Europe is very different from what it is in North America. When ExxonMobil was disappointed in Poland, it was not for want of trying. Rather US technology was found lacking when it came to Polish geology. There is no one size fits all! The American shale revolution got where it is today through massive investment and commitment towards research and development (and over two decades of perseverance). I don’t see that level of commitment in Europe,” he said.

 

Speaking to the Oilholic, following his lecture, Prof. Stevens said the export of US gas to the UK was plausible, but that Asia was a much more natural export market for the Americans. “Plus, let’s not forget that the moment US exports start to rise meaningfully, there is always a chance the likes of Congressman Ed Markey might take a nationalistic tone and try to stunt them,” he added.

 

Quite true, after all we got a glimpse of Markey’s intellect via his ‘Bolshoi’ Petroleum remark! 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. Sullom Voe Terminal, UK © BP Plc

Exxon 1 – BP 0 (Ref: Putin, Retired Hurt: Markey)

One has to hand it to ExxonMobil’s inimitable boss – Rex Tillerson – for successfully forging an Arctic tie-up with Rosneft so coveted by beleaguered rival BP. On August 30, beaming alongside Russian Prime Minister Vladimir Putin, Tillerson said the two firms will spend US$3.2 billion on deep sea exploration in the East Prinovozemelsky region of the Kara Sea. Russian portion of the Black Sea has also been thrown in the prospection pie for good measure as has the development of oil fields in Western Siberia.

The US oil giant described the said deal as among the most promising and least explored offshore areas globally “with high potential for liquids and gas.” If hearts at BP sank, so they should, as essentially the deal has components which it so coveted.

The Oilholic is pretty stumped too for harbouring the belief that BP's Arctic deal with Rosneft – originally agreed in January but scuppered by a legal challenge from Russian co-investors in BP's existing Russian joint venture TNK-BP – would be revived. It seems what BP could not manage, ExxonMobil did, and successfully fought off Shell in the process as well if the City rumour mill is to be believed. Some won, some lost, some got stumped but one looked like a moron or hypocrite or possibly both. That is none other than US Congressman Ed Markey, a Massachusetts Democrat on the House Natural Resources Committee.

Remember when BP first announced its proposed tie-up Rosneft back in January? At the time Markey quipped "BP once stood for British Petroleum. With this deal, it now stands for Bolshoi Petroleum." Bolshoi actually means “big” in Russian so it seems while Markey had right context for the slur, he ended up choosing the wrong word.

As the news of the Exxon-Rosneft tie-up emerged, Eben Burnham-Snyder, Markey's spokesman, told the Associated Press that the Congressman's office is looking into the Exxon-Rosneft deal. But he said the deal doesn't appear to involve the same ownership issues that were involved in the BP-Rosneft stock swap. Tut, tut, sir! Of course they don’t – after all this time it is an American firm that’s gone fishing.

As if with impeccable timing, barely a day after Exxon-Rosneft deal was inked, Russian Bailiffs raided the offices of BP in Moscow, seeking documents on its failed deal with Rosneft. According to RIA Novosti, the raid was conducted in line with a ruling by an arbitration court in the Siberian region of Tyumen, which is hearing a case over the Rosneft deal that collapsed in May.

Minority shareholders are claiming that TNK-BP suffered losses of US$3 billion as a result of the wrangling over the now failed BP-Rosneft joint venture. In a statement, BP confirmed that its Russian offices in Moscow were raided by the Russian bailiff's service in relation to an order from the court in Tyumen.

The company said there was no "legitimate basis" for the court case against BP or the raid. The legal entity searched in the raid - BP Exploration Operating Company Ltd - had “no connection to the Tyumen process,” the statement read. Let the games begin! Maybe this time Markey can be the referee!

© Gaurav Sharma 2011. Photo: ExxonMobil office exterior, Houston, Texas, USA © Gaurav Sharma, March 2011