Murban futures launch, OPEC+ and Q1 2021

The first crude quarter of 2021 threw up a number of interesting developments for the oil markets, from fluctuating price sentiments to a divergence of views on the global supply-demand dynamic. More on market permutations later, but the Oilholic would like to kick-off this post by flagging a historic development that carries the potential of bringing about profound changes to the crude futures market – the launch of the Murban Futures contract.

It had been long-time coming with ambitions for the contract launch first surfacing early in 2019, and official confirmation arriving later that year. Market upheaval caused by the Covid-19 pandemic pushed the launch forward to 2021, when on March 29 the contract launched with a debut price of $63.43 per barrel. 

And with it history was made – Murban, traded on IntercontinentalExchange Futures Abu Dhabi, is the world's first futures contract predicated on the Abu Dhabi National Oil Company's (ADNOC) flagship onshore crude oil. It means the offered market positions are directly linked to a major regional production centre. 

Alongside ADNOC as its backer, are nine of the world's largest energy traders including BP, ENEOS, GS Caltex, INPEX, PetroChina, PTT, Shell, Total and Vitol. Their hope is that physical oil traders use it as a benchmark, and price quality differentials off it accordingly as is the case with Brent. If physical traders are convinced that the new benchmark is reasonably liquid, it would take liquidity away from WTI, Brent and Dubai crude.

That is no mean feat and there have been previous false dawns in the region. To improve the odds of the benchmark's success, ADNOC has removed destination restrictions on the crude setting Murban apart from its regional competitors who have historically been bogged down by such limitations. And Asian refiners will now have a direct means to hedge against shifts in the price of Murban, rather than using derivatives linked to Dubai crude.

Of late, ADNOC’s production levels have averaged above 2 million bpd, with half of it set aside for the export market. In Fujairah - the main delivery point for Murban - ADNOC is currently building underground storage caverns that will be able to hold 42 million barrels of crude, including Murban. This will further strengthen the physical barrel underpinning of Murban futures. All in all, a very noteworthy development that carries a reasonably high chance of success over the coming years. Here's the Oilholic’s more detailed take on the development via Forbes.

Switching tack from the debut of Murban futures to the crude world in general, bullish sentiment that took hold in November 2020 has catapulted oil prices from $40 to $60-plus levels for both Brent and WTI. There's now chatter of $100 per barrel medium-term prices and a spike to even $190 in certain circumstances if you are to believe JPMorgan. 

This is nothing short barmy chatter by the longs and is wildly optimistic. In terms of reconciling expected crude oil demand in a post-Covid world versus supply, the Oilholic reckons the paper market is running two to three quarters, or around $5 per barrel, ahead of the physical market. 

Economic output in key markets remains sluggish, while the International Energy Agency (IEA) does not expect crude demand to catch up with supply until the third quarter of 2021. As for OPEC+, while its market calls on March 4 and April 1 have been described as bullish, they are in truth really bearish. 

On March 4, OPEC+'s headline production cut level was pegged at 7 million bpd, along with an additional and surprising voluntary cut of 1 million bpd by Saudi Arabia alone. However, Russia and Kazakhstan were allowed to marginally increase their output to keep the OPEC+ peace.

And on April 1, OPEC+ said an additional 350,000 bpd will be added to production, with another 350,000 in June. From July, output will be increased by 450,000 bpd. Both OPEC+ announcements cheered the bulls. However, the market remains in real danger of getting ahead itself. That’s all for the moment folks! Keep reading, keep it crude!

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© Gaurav Sharma 2021. Photo: Kristina Kasputienė from Pixabay

Joining Citi Private Bank

Some personal news: After 16 years of scrutinizing #oil, #energy markets, felt I needed a change. Delighted to accept such an opportunity @Citi Private Bank at VP-level. I remain a 'crude' man but broadening analytical scope to EMs, circular economy, impact investing & more #OOTT

— Gaurav Sharma (@The_Oilholic) August 11, 2020

It has been a fantastic 'crude' journey for the Oilholic in the energy market and this blog has been with yours truly every step of the way for over a decade. Thank you all for your support. While long may that continue, commentary here would be a little tempered and slightly irregular as this blogger has taken up a Vice President / Lead Analyst's position at Citi Private Bank. 

Things won't be coming to a close here, but whatever appears on this blog would be in a private capacity only. That also applies to any commentary published here in the past prior to Aug 1, 2020. That's all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2020.

Ten years of 'crude' blogging & a big thank you!

Its a day to say thanks and feel a tad nostalgic, as the Oilholic woke up this Christmas eve morning to the realization that today marks 10 years of this oil and gas market blog's appearance on cyberspace!

Boy does time fly! When yours took this blog live and put his first post up on December 24, 2009, Barack Obama had been in the White House for less than a year; Gordon Brown was still in Downing Street; the global economy was limping back from the financial crisis; the US shale revolution's impact hadn't been felt; OPEC had held its latest minister's meeting in Luanda, Angola instead of its secretariat in Vienna, Austria; and Brent and WTI futures closed at $76.31 and $78.05 per barrel respectively, with a premium in the latter's favour! That's a 10-year decline of $9.84 (-12.9%) for Brent and $17.5 (-22.42%) for WTI versus this European morning's prices in Asia.  

Back then, all this blog had was a handful of readers comprising of mutual acquaintances in the trading community who had been providing tips and invaluable feedback since 2007, when yours truly was working on concepts, and a trail site/domain. The subsequent blogging journey began on Christmas eve of 2009 when the Oilholic registered the www.oilholicssynonymous.com domain, and it has been quite a ride, and more, ever since. 

The blog underwent a complete template overhaul in 2011 as the readership started gaining traction. Well past its millionth pageview, it currently averages 12,000 reads a month. 

Well above average readership points are often brought about by posts on energy sector developments and events such as IPWeek, CERAWeek, OPEC and ADIPEC, where this blogger often takes speaking engagements at, resulting in monthly pageviews jumping above 100,000 reads a month. 

As in previous years, bulk of the readers who browse and read this blog in 2019 have come from the US, UK, Norway, Germany and China in that order, with American and British readers leading the pack by some distance. 

Many have logged in from some 127 countries week in, week out. So a massive thank you to all of you because without your readership, feedback and support this blog wouldn't be here. Alongside regular readers who find this blog via established routes, analytics also reveal the impact of Google, where many of you find your way to the Oilholic alongside LinkedIn, Twitter and Forbes.

What this blog has been about over the last 10 years is what it will be about in the future, carrying the Oilholic's analysis, thoughts, rants, musings and social media flags, about past events, developments and emerging scenarios in the sector, and the comments of fellow market experts one is able to interact with. 

It'll also continue to complement the Oilholic's analysis and media career, speaking circuit engagements, serve as a published clippings portfolio hub, broadcast commentary, work undertaken over the last 20 years (and counting), some favourite photographs and a selection of book reviews.

As the years go by, here's hoping this blog is (and will be) as much fun for those reading it as it is for the one writing it. So keep reading, keep it 'crude' and once again thank you for all your support.

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© Gaurav Sharma 2019. Photo: Screenshot of Oilholics Synonymous Report's homepage in 2010 © Gaurav Sharma.

Enhanced gas recovery & the good folks at DGOC

The Oilholic just got back from a quick turnaround research trip to the US Appalachian Basin covering the hydrocarbon rich prospection patch between Morgantown, West Virginia and Pittsburgh, Pennsylvania.

The latter being that promised American departure point yours truly told you about in 2016, where even the airport authority is privy to the proceeds natural gas! 

Having spent the last six months being convinced by academics and policy wonks that the Appalachian Basin is in trouble given oversupply, pipeline capacity issues, and the prospect of sub-$2/MMBtu Henry Hub prices, it was a breath of fresh air listening to the good folks at Diversified Gas and Oil Plc (LON:DGOC).

The company is currently listed on AIM, has formally announced its intention to move to London's main market and says that business is good. DGOC's simple, effective modus operandi is going after mature long life conventional wells in the region, often neglected by exploration and production firms obsessed with unconventional shale exploration.

The company's CEO Rusty Hutson (fifth from left), COO Brad Gray (second from left) and their team on the ground in Pennsylvania took this blogger around their patch explaining their methods, which include deploying a surprisingly low amount of contractors on site, entrusting employees to chart cost effective, efficient and resource maximising pathways, and of course some prudent management.

Hutson and Gray are also pretty acquisitive almost, always fishing around for primarily natural gas assets they can buy, often at low cost, to turn them around. To give the readers a flavour, recent sellers to DGOC have included the likes of EQT, CNX and Anadarko.

By drilling few wells, and mainly operating and maximising already onstream wells totalling over 60,000, team DGOC believe they can make a decent margin even at $2/MMbtu Henry Hub prices with smart strategic hedging, including hedges stretching 10 years out in the case of some instruments they have deployed.

If enhanced hydrocarbon recovery will bring about a new output wave stateside as many market commentators think, DGOC's contribution is over 92,000 barrels of oil equivalent per day (boepd) to that pool and rising.

You can expect more of the same, and more, Hutson assures the Oilholic. More observations from the trip to follow for publishing outlets but that's all for the moment folks! Keep reading, keep it 'crude'!

Addendum I - 27.09.19: Thoughts via Rigzone - 'Smart' Appalachian Operators Can Handle Sub $2 Natural Gas. Click here.

Addendum II - 07.10.19: Thoughts via Forbes - Enhanced Recovery Maverick: Meet West Virginia Oilman Taking Resource Maximization To New Heights. Click here.

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© Gaurav Sharma 2019. Photo I: Morgantown, West Verginia, US from the air. © Gaurav Sharma, September 2019. Photo II & III: Gaurav Sharma onsite with DGOC personnel in Pennsylvania, US © Ben Romney, September 2019. 

Various media missives on energy market

The last fortnight has just zipped by with so much going on in the energy market that the Oilholic did not get time to pen his thoughts here (apologies!). However, here are a plethora of thoughts for various publishing outfits on various energy related subjects. 

First off, despite all the geopolitical pressures, worries of an escalating trade war continues to be the dominant bearish sentiment in the market and could turn mildly bullish if resolved. So here are some thoughts on Forbes in defence of those with bearish oil price forecasts who some say are being complacent, alongside a note on the prospects of US Midstream stocks. 

And a take on why Formula E versus Formula 1 motorsports offer a microcosm of the tussle for human mobility. Away from Forbes here is yours truly's article on the Big Data tsunami that is heading the oil and gas industry's way via Rigzone.

Finally, here's a take on the cybersecurity challenge the energy industry faces on Energy Post (behind paywall). More on this mad, mad crude market soon. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2019.

Two tech-heavy 'crude' days at Ignite 2019

The Oilholic has spent the last two days in Oslo, Norway attending energy software firm Cognite's annual Ignite 2019 conference at the City's H3 Arena. 

Founded by entrepreneur John Markus Lervik, this energy software start-up majority-owned by Norwegian investment firm Aker, has been making waves in the oil and gas industry as a provider of advanced data and digitization services. 

The firm's industry solutions and analytics bank on operations and equipment sensors that help boost efficiency, throughput and reduce costs by several multiples – something oil and gas players can easily relate to especially in the current volatile oil price climate and pressure for lower breakevens. 

Within just over three years (and counting) of its founding, Cognite has bagged nearly 30 customers including big names such as OMV, Aker BP and Lundin Petroleum. Ignite 2019 was the company's attempt at showcasing what it can offer and trigger debates and dialogues about process efficiencies and optimisation.

Inevitably, in the age of advanced analytics and artificial intelligence, much of the discourse centred on 'Big Data for 'Big Oil'. The conference was supported by companies such as Cognizant, Google, Framo, Siemens, National Instruments and Aker BP to name a few. Nikolai Astrup, Minister of Digitalization of Norway, started proceedings declaring "data is gold."

The minister went on to note: "If we refine, manage and share data appropriately it will lay the foundation for better and more effective public services, new industry successes and create jobs. 

"The Norwegian government has just launched an ambitious digitalization strategy, making us a pioneer in creating good public services for citizens, businesses and the voluntary sector."

A packed agenda saw several speakers outline the kind of efficiencies their digitisation efforts are bringing about and the results they have yielded. For instance, here is the Oilholic's report for Forbes on how Austria's OMV has managed to lower its production costs from $15 per barrel down to $7 per barrel.

While the job of impressing the sector and bagging clients is well underway, and Cognite's product suite is helping the company to grow profitably, further capital for expansion will be needed. To that end, this blogger sat down with Lervik to discuss his future plans, including those for a possible initial public offering. Here's this blogger's full interview for Forbes in which Lervik also discusses Cognite’s expansion to Asia and North America. 

Following an evening of networking over some fun music and drinks on day one, day two brought more efficiencies discussions to the fore, not necessarily digressing from the oil and gas industry theme but including renewables and low carbon as vital topics.

As were the subjects of advanced data analytics and cloud computing, with Darryl Willis, VP Oil, Gas & Energy at Google Cloud, telling Ignite 2019 delegates that every industry, including energy, will be grappling with data as the new common denominator. "Data science to real time monitoring aided by cloud computing and data analytics would only be to the industry advantage."

Plenty more articles coming up from the deliberations for Forbes, Rigzone and Energy Post over the next few weeks, but that's all from Ignite 2019 on that note. After a few more meetings in Oslo, it'll be time for the big bus home. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2019. Photo 1: Oslofjord Ferry Pier, Oslo, Norway. Photo 2: Nikolai Astrup, Minister of Digitalization of Norway speaks at Ignite 2019 at the H3 Arena in Oslo, Norway. Photos 3&4: Glimpses of networking floor at Ignite 2019 © Gaurav Sharma, June 2019.

That over 10% slump in oil price

As the crazy month of May comes to a close, commentators using the supply constriction and geopolitical risk premium pretexts to big up prices have been left scratching their heads. Using Middle Eastern tension and murmurs of OPEC rolling over production cuts as the backdrop for predicting $80+ Brent prices didn't get anywhere fast. 

Instead prices went into reverse as the US-China trade spat, Brexit, Chinese and German slowdown fears weighed on demand sentiment. Here is yours truly's take via Forbes:

Trump’s trade war rhetoric is a factor in oil demand, but other concerns over the global economy are rightfully cancelling supply constriction arguments https://t.co/7zBKGmM5Fn pic.twitter.com/GWtEMAPROW

— Forbes (@Forbes) May 31, 2019

For what it is worth, at the time of writing this blog post both oil benchmarks are posting a May decline of +10% in what can only be described as a crude market rout. 

Away from the oil price, it seems rating agency Moody's has withdrawn all the ratings of Venezuela's beleaguered oil firm PDVSA including the senior unsecured and senior secured ratings due to "insufficient information." At the time of withdrawal, the ratings were 'C' and the outlook was 'stable'.

With Venezuela in free-fall and its oil production well below 1 million barrels per day (at 768,000 bpd in April) - not much remains to be said. In any case, the US will be importing less and less crude from Latin America not what happens in Caracas, given uptick in its shale-driven output. 

Away from 'crude' matters, the Oilholic also touched on LNG markets. Here is yours truly's take for Forbes on how the US-China trade spat will serve to dampen offtake for US LNG Projects; and here is a missive for Rigzone on the disconnect between US President Donald Trump's rhetoric on American LNG exports to the Baltics versus the ground reality. 

That's all for the moment for mad May folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2019. 

Webcasting for ReachX & Trump's OPEC call

It's been quite a week in the oil market with Brent touching $75 per barrel for the first time in 2019, amid exaggerated long calls reminiscent of Q4 2018, and we all know how that ended. In this backdrop, the Oilholic did his first oil market webcast for independent financial platform ReachX.

The company is working to shake-up traditional financial market research and investment banking services via its technology platform. The idea was born out of creating an unbiased research, information and services hub fit for a post-MiFID II investment and operating environment, and the Oilholic has been involved in its progress since the summer of last year with co-founders Rafael S. Lajeunesse and Olivier Beau de Loménie.

The topic of the webcast was what's in store for the oil market in H2 2019, especially as the Oilholic believes the current set of market fundamentals suggest there's not much further for Brent to go than beyond $75 per barrel, and in fact it is likely to average towards the lower range of $70-75 per barrel this year.

Here's a recording of the webcast on YouTube, which has been converted into a podcast by the good folks at ReachX:

And should you wish to listen to it on SoundCloud; here's a link to that as well.

Away from the webcast, just as Brent hit $75, US President Donald Trump hit it. Ahead of a political rally, the President said he'd "called OPEC" and that oil prices were coming down. Cue a slide on that pretext in this Goldilocks Economy, where crude has little room to go further up. Here are the Oilholic's thoughts in more detail via a Forbes post. That's all for the moment folks, keep reading, keep it 'crude'!

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© Gaurav Sharma 2019.

Being careful of what Hedge Funds wish for

So it is that OPEC has moved its ministers meeting, and the OPEC/non-OPEC from April 17/18 to June 25/26, but the Oilholic decided to come to the Austrian capital anyway given that other 'crude' meetings could not be moved, and because Vienna is lovely in the spring anyway!

While spring might be in the air in Vienna, a bit of craziness has surfaced in the Oil market trading sphere. Yet again, no sooner has Brent crossed $70, chatter of three-figure crude prices is again rearing its head. Here's the Oilholic warning from very recent history (via Forbes); and why caution is merited.

There is nothing on the horizon to be overtly bullish about the oil market – bearish variables (i.e. China, President Donald Trump's trade salvos, Brexit, German slowdown and changing consumption patterns haven't materially moved yet) and bullish quips based on geopolitics (i.e. Libya, Venezuela and Nigeria) matter but are being countered partially, if not wholly, with sentiment around rising US production.

Replicating a favourite pastime of the inimitable former Saudi Oil Minister Ali Al-Naimi, on this sunny day in Vienna - I could think of nothing better than a brisk walk down the city's Ring Road from the Intercontinental to Rathaus, before the flight home : ) pic.twitter.com/xyEn9IQd9F

— Gaurav Sharma (@The_Oilholic) April 19, 2019

Few in Vienna, think an oil price spike is on the cards, having had three days of deliberations over, let's face it more than three friendly beers. That sentiment is echoed by both heavy sour and light sweet physical traders the Oilholic has spoken to in Shanghai and Rotterdam. 

Not many believe OPEC wants three-figure prices; and even if they do, more light sweet American crude is hitting the market heading to Asia. Yours truly has long maintained that we are stuck in a boring oscillation between $60-80 per barrel prices; a predictability that hedge funds find boring for very different monetary reasons. Let's leave it at that!

As for OPEC, it is not going to move until Trump decides on if and what kind/level of waivers he is going to grant importers of Iranian crude or not. That and balancing Russia’s concerns are probably the primary reasons behind postponing its ministers' meeting. That's that from Vienna until June.

Interspersed between crude meetings, the Oilholic also found time for a mooch about Vienna's Ring Road on a sunny afternoon, starting from the Intercontinental Hotel to the Rathaus up to Karlskirche; partially replicating the past-time of Ali Al-Naimi, the inimitable former Saudi Oil Minister. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2019. Photo © Gaurav Sharma, 2019

More composed 'crude' thoughts on Forbes

As promised post-OPEC, the Oilholic is putting forward some more composed crude thoughts, following the Non-OPEC and OPEC declaration of a 1.2 million barrels per day (bpd) oil production cut last week. 

Here they are via a Forbes piece. One's verdict - it won't be enough, even if further Iranian declines increase the cuts to 1.5 million bpd. There's always the issue of compliance and demand side pressures too. Crude oil benchmarks are not spiking anytime soon.

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© Gaurav Sharma 2018. 

Crude market, Russia & fretting over Afren

There's been an unsurprising calm in the oil market given the existing supply-side scenario, although the WTI's slip below three figures is more down to local factors above anything else.

Demand stateside is low while supplies are up. Additionally, the CVR Refinery in Coffeyville, Kansas which uses crude from Cushing, Oklahoma and churns 115,000 barrels per day (bpd) is offline and will remain so for another four weeks owing to a fire. It all means that Brent's premium to the WTI is now above US$7 per barrel. Despite (sigh) the latest Libyan flare-up, Brent itself has been lurking either side of $105 level, not as much down to oversupply but rather stunted demand. And the benchmark's current price level has triggered some rather interesting events.

Brent's premium to Dubai crude hit its lowest level in four years this week. According to Reuters, at one point the spread was as low as $1.20 following Monday's settlement. The newswire also reported that Oman crude actually went above Brent following settlement on July 31, albeit down to thin trading volumes.

Away from pricing, the Oilholic has been busy reading agency reports on the impact of the latest round of sanctions on Russia. The most interesting one came from Maxim Edelson of Fitch Ratings, who opined that sanctions could accelerate the decline of Siberian oilfields.

Enhanced recovery techniques used in these fields are similar to those used for shale oil extraction, one of the target areas for the sanctions. As the curbs begin to hit home and technology sales to the Russian oil & gas sector dry up, it will become increasingly harder to maintain rate of production from depleting West Siberia brownfields.

As brownfields are mature, major Russian oil companies are moving into more difficult parts of the existing formations. For example, GazpromNeft, an oil subsidiary of Gazprom, is increasingly relying on wells with horizontal drilling, which accounted for 42% of all wells drilled in 2013 compared to 4% in 2011, and multi-stage fracking, which was used in 57% of high-tech wells completed in 2013, up from 3% in 2011.

"In the medium term, [EU and US] measures are also likely to delay some of Russia's more ambitious projects, particularly those on the Arctic shelf. If the sanctions remain for a very long time they could even undermine the feasibility of these projects, unless Russia can find alternative sources of technology or develop its own," Edelson wrote further.

Russian companies have limited experience in working with non-traditional deposits that require specialised equipment and "know-how" and are increasingly reliant on joint ventures (JVs) with western companies to provide technology and equipment. All such JVs could be hit by sanctions, with oil majors such as ExxonMobil, Shell and BP, oil service companies Schlumberger, Halliburton and Baker Hughes, and Russia's Rosneft, GazpromNeft and to a lesser extent LUKOIL, Novatek and Tatneft, all in the crude mix.

More importantly, whether or not Russia's oil & gas sector takes a knock, what's going on at the moment coupled with the potential for further US and EU sanctions on the horizon, is likely to reduce western companies' appetite for involvement in new projects, Edelson adds.

Of course, one notes that in tune with the EU's selfish need for Russian gas, its sanctions don't clobber the development of gas fields for the moment. On a related note, Fitch currently rates Gazprom's long-term foreign currency Issuer Default Rating (IDR) at 'BBB', with a 'Negative' outlook, influenced to a great extent by Russia's sovereign outlook.

Continuing with Russia, here is The Oilholic's Forbes article on why BP can withstand sanctions on Russia despite its 19.75% stake in Rosneft. Elsewhere, yours truly also discussed why North Sea exploration & production (E&P) isn't dead yet in another Forbes post.

Finally, news that the CEO and COO of Afren had been temporarily suspended pending investigation of alleged unauthorised payments, came as a bolt out of the blue. At one point, share price of the Africa and Iraqi Kurdistan-focussed E&P company dipped by 29%, as the suspension of CEO Osman Shahenshah and COO Shahid Ullah was revealed to the London Stock Exchange.

While the wider market set about shorting Afren, the company said its board had no reason to believe this will negatively affect its stated financial and operational position.

"In the course of an independent review on the board's behalf by Willkie Farr & Gallagher (UK) LLP of the potential need for disclosure of certain previous transactions to the market, evidence has been identified of the receipt of unauthorised payments potentially for the benefit of the CEO and COO. These payments were not made by Afren. The investigation has not found any evidence that any other Board members were involved," it added.

No conclusive findings have yet been reached and the investigation is ongoing. In the Oilholic's humble opinion the market has overreacted and a bit of perspective is required. The company itself remains in a healthy position with a solid income stream and steadily rising operating profits. Simply put, the underlying fundamentals remain sound.

As of March 31 this year, Afren had no short-term debt and cash reserves of $361 million. In 2013, the company improved its debt maturity profile by issuing a $360 million secured bond due 2020 and partially repaying its $500 million bond due 2016 (with $253 million currently outstanding) and $300 million bond due 2019 (with $250 million currently outstanding).

So despite the sell-off given the unusual development, many brokers have maintained a 'buy' rating on the stock pending more information, and rightly so. Some, like Investec, cautiously downgraded it to 'hold' from 'buy', while JPMorgan held its 'overweight' recommendation on the stock. There's a need to keep calm, and carry on the Afren front. That's all for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Russian Oilfields © Lukoil

OPEC’s spare capacity & some corporate quips

Oil benchmarks have by and large remained calm in the face of escalating tensions in Iraq. Market sentiment was helped in no small parts by the US importing less crude and ISIS being kept at bay from Iraqi oilfields. Nonetheless, what does the current situation mean for OPEC's spare capacity, concerns over which have marginally eased as non-OPEC production is seen rising.

Over the first quarter of this year, OPEC's spare capacity was in the region on 1.9 million barrels per day (bpd), bulk of which – 1.75 million bpd – is in the hands of Saudi Arabia.

Société Générale CIB analysts Patrick Legland and Daniel Fermon, recently raised a very important question in a note to clients – so assuming that within OPEC, supply from Iran, Iraq, and Libya does not increase and Saudi spare capacity is not sufficient to offset a potential Iraqi crisis, what then? A scary prospect, especially if Iraqi tensions spill to southern oilfields.

SocGen's veteran analyst Mike Wittner assigns only a 20% probability of crude oil exports from southern Iraqi oil fields (of Basrah) being disrupted. Current output is in the region of 2.5-2.6 million bpd or 3% of global production. In line with other city commentators and the Oilholic's own conjecture, Wittner says were Basrah to be hit, Brent could move up quickly into the US$120-125 range.

Let's hope it doesn't get hit, as Legland and Fermon note, in the past 50 years, 5 out of 7 recessions coincided with an oil shock, with oil prices skyrocketing. "However, to date, no one is expecting the oil price to rise to $150 or above; so concerns over an oil-led recession appear exaggerated," they add.

Away from pricing matters, a couple of corporate quips starting with a small cap. London AiM-quoted North Africa focussed E&P firm Circle Oil has largely kept the market on its side despite niggles it faces in Egypt along with other operators in the country. From where this blogger stands, Circe Oil's operations in Morocco and Tunisia remain promising and its receivables position in Egypt is in line with most (around the 180 debtor day norm).

Investec analyst Brian Gallagher has reaffirmed the bank's buy rating. Explaining his decision in a note to clients, Gallagher observed that Circle Oil "generated operational cashflow in excess of $50 million in 2013 and we expect it to match or exceed this level again in 2014. This marks Circle out from many of its small cap E&P peers who struggle to fund exploration campaigns. Circle has two impact operations currently in process. Moroccan exploration recently began (successfully) while results from the Tunisian well, EMD-1, are imminent. In the background, Egypt continues to perform."

The company is busy prospecting in Oman as well, even though it's early days. So methinks, and Gallagher thinks, there's a lot to look forward to. Switching tack to a couple of large caps, Fitch Ratings revised BG Energy's outlook to negative at A- and maintained BP's at A+/stable.

Starting with the former, the agency said BG's negative outlook reflects completion risks associated with its new upstream projects, challenges that the company is facing in Egypt, and the potential that funds from operations (FFO) adjusted net leverage may stay above 2.5 times in the medium-term should there be any delays to project start-ups.

"Presently, we view the group's credit metrics as stretched for the current ratings because of BG's ambitious investments coinciding with declining production, despite a series of asset disposals intended to strengthen the group's balance sheet," Fitch noted, adding that it expects the company’s business profile to improve with the start-up of its major projects in Australia and Brazil.

On BP, Fitch views its operational profile as commensurate with the 'AA' category. "Presently, BP's rating direction depends largely on the outcome of legal proceedings related to the 2010 Macondo oil spill. At end the of the first quarter of 14, BP had provisioned $42.7 billion in total for claims and other related payments, of which it had paid out $34.9 billion."

Fitch says that total payments below $70 billion, including amounts already paid out and the balance paid over a period of several years, are likely to keep BP in the 'A' rating category, while payments exceeding this amount may push the company's ratings into the 'BBB' category.

On a broader footing, Fitch has maintained a stable outlook for its rated EMEA oil and gas companies. Senior director Jeffrey Woodruff says negative outlooks on certain companies such as BG was mainly due to company specific problems rather than broad based sector weakness. "It is worth highlighting, that more than 80% of issuers in Fitch's EMEA oil and gas portfolio have stable outlooks and the number of positive outlooks doubled since 2013 to 5% from 2.5%," he adds.

Finally, rounding the last four hectic weeks off, here is the Oilholic's latest article for Forbes touching on the recent jumpiness over the possibility of US crude oil exports. Yours truly does see a distinct possibility of it happening at some point in the future. However, it won’t happen any time soon and certainly not in an election year, with a race to the White House to follow.

Last month also saw this blogger head to Moscow for the 21st World Petroleum Congress and a predictable 165th OPEC summit prior to that, where the organisation maintained its quota and Abdalla Salem El-Badri stayed on as Secretary General. As usual there were TV soundbites aplenty - the Oilholic's including - plus hustle, bustle, bluster and differences of opinion that go along with events of this nature. So for a change, one is glad this month's pace would be a shade slower. That's all for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: Oil pump in Russia © Lukoil. Photo 2: Gaurav Sharma speaking on OPEC Webcast © OPEC, June 11, 2014.

Maintaining 2014 price predictions for Brent

Since the initial flare-up in Iraq little over a fortnight ago, many commentators have been revising or tweaking their Brent price predictions and guidance for the remainder of 2014. The Oilholic won't be doing so for the moment, having monitored the situation, thought hard, gathered intelligence and discussed the issue at length with various observers at the last OPEC summit and 21st World Petroleum Congress earlier this month.

Based on intel and instinct, yours truly has decided to maintain his 2014 benchmark price assumptions made in January, i.e. a Brent price in the range of US$90 to $105 and WTI price range of $85 to $105. Brent's premium to the WTI should in all likelihood come down and average around $5 barrel. Nonetheless, geopolitical premium might ensure an upper range price for Brent and somewhere in the modest middle for the WTI range come the end of the year.

Why? For starters, all the news coming from Iraq seems to indicate that fears about the structural integrity of the country have eased. While much needed inward investment into Iraq's oil & gas industry will take a hit, majority of the oil production sites are not under ISIS control.

In fact, Oil Minister Abdul Kareem al-Luaibi recently claimed that Iraq's crude exports will increase next month. You can treat that claim with much deserved scepticism, but if anything, production levels aren't materially lower either, according to anecdotal evidence gathered from shipping agents in Southern Iraq.

The situation is in a flux, and who has the upper hand might change on a daily basis, but that the Iraqi Army has finally responded is reducing market fears. Additionally, the need to keep calm is bolstered by some of the supply-side positivity. For instance, of the two major crude oil consumers – US and China – the former is importing less and less crude oil from the Middle East, thereby easing pressure by the tanker load. Had this not been the case, we'd be in $120-plus territory by now, according to more than one City trader.

Some of the market revisions to oil price assumptions, while classified as 'revisions' have been pragmatic enough to reflect this. Many commentators have merely gone to the upper end of their previous forecasts, something which is entirely understandable.

For instance, Moody's increased the Brent crude price assumptions it uses for rating purposes to $105 per barrel for the remainder of 2014 and $95 in 2015. In case of the WTI, the ratings agency increased its price assumptions to $100 per barrel for the rest of 2014, and to $90 in 2015. Both assumptions are within the Oilholic's range, although they represent $10 per barrel increases from Moody's previous assumptions for both WTI and Brent in 2014 and a $5 increase for 2015.

"The new set of price assumptions reflects the agency's sense of firm demand for crude, even as supplies increase as a response to historically high prices. New violence in Iraq coupled with political turmoil in that general region in mid-2014 have led to supply constraints in the Middle East and North Africa," Moody's said.

But while these constraints exist, Moody's echoed vibes the Oilholic caught on at OPEC that Saudi Arabia, which can affect world global prices by adjusting its own production levels, has appeared unwilling to let Brent prices rise much above $110 per barrel on a sustained basis.

Away from pricing matters to some ratings matters with a few noteworthy notes – first off, Moody's has upgraded Schlumberger's issuer rating and the senior unsecured ratings of its guaranteed subsidiaries to Aa3 from A1.

Pete Speer, Senior Vice-President at the agency, said, "Schlumberger's industry leading technologies and dominant market position coupled with its conservative financial policies support the higher Aa3 rating through oilfield services cycles. The company's growing asset base and free cash flow generation also compares well to Aa3-rated peers in other industries."

Meanwhile, Fitch Ratings says the Iraqi situation does not pose an immediate threat to the ratings of its rated Western investment-grade oil companies. However, the agency reckons if conflict spreads and the market begins to doubt whether Iraq can increase its output in line with forecasts there could be a sharp rise in world oil prices because Iraqi oil production expansion is a major contributor to the long-term growth in global oil output.

The conflict is closest to Iraqi Kurdistan, where many Western companies including Afren (rated B+/Stable by Fitch) have production. However, due to ongoing disagreements between Baghdad and the Kurdish regional government, legal hurdles to export of Iraqi crude remain, and therefore production is a fraction of the potential output.

Other companies, such as Lukoil (rated BBB/Negative by Fitch), operate in the southeast near Basra, which is far from the areas of conflict and considered less volatile.

Alex Griffiths, Head of Natural Resources and Commodities at Fitch Ratings, said, "Even if the conflict were to spread throughout Iraq and disrupt other regions, the direct loss of revenues would not affect major investment-grade rated oil companies because Iraqi output is a very small component of their global production."

"In comparison, disruption of gas production in Egypt and oil production in Libya during the "Arab Spring" were potential rating drivers for BG Energy Holdings (A-/Stable) and Eni (A+/Negative), respectively," he added.

On a closing note, here is the Oilholic's latest Forbes article discussing natural gas pricing disparities around the world, and why abundance won't necessarily mitigate this. That's all for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Oil drilling site © Shell photo archives

Iraqi situation likely to unleash crude bull runs

Just as the OPEC conference dispersed here in Vienna, the speed with which the situation in Iraq has deteriorated has taken the market by surprise. Can't even blame Friday the 13th; the deterioration started a few days before.

There was not an Iraqi official commentator in sight when the trickle of news turned into a flood announcing the rapid advance of Sunni militants (or the Islamic State in Iraq and the Levant, an al-Qaeda breakaway) across vast swathes of the country to within touching distance of Baghdad.

The market is keeping reasonably calm for now. However, both Brent spot and futures prices did spike above US$113 per barrel at one point or another over the last 72 hours. We're already at the highest levels this far into 2014. The Oilholic has always been critical when paper traders jump to attach instant risk premium to the crude price at the slightest ripple say in Nigeria or Libya. However, this alas is something else and it matters.

For starters, Iraqi production was on a slow and painful recovery run. The trickle of inward investment had started and Kurdish controlled areas weren’t the only ones seeing a revival. This is now under threat. Secondly, a visibly deteriorating situation could draw Iran into the tussle and there are some signs of it already. Thirdly, it has emboldened Kurdish security forces to take over Kirkuk, with unhidden glee. This could dent ethnic calm there in that part of the country.

Fourthly, Iraq despite its troubles remains a key member of OPEC. Finally, if you look at a map of Iraqi oilfields, the areas now held by the insurgents would trouble most geopolitical commentators as they cover quite a few hydrocarbon prospection zones. Add it all together and what's happening in Iraq, should it continue to deteriorate, has the potential of adding at least $10 per barrel to the current price levels, and that’s just a conservative estimate.

If Iraq gets ripped apart along ethnic lines, all projections would be right out of the window and you can near double that premium to $20 and an unpredictable bull run. That tensions were high was public knowledge, that Baghdad would lose its grip in such a dramatic fashion should spook most. There is one but vexing question on a quite a few analysts’ minds – is this the end of unified Iraq? The Oilholic fears that it might well be. 

Away from this depressing saga, a couple of notes from ratings agencies to flag up. Moody's says the outlook for global independent E&P sector remains positive. It expects growth to continue over the coming 12-18 months, with no "obvious catalyst" for a slowdown.

Analyst Stuart Miller reckons unless the price of crude drops below $80 per barrel, investment is unlikely to fall materially for oil and liquids-oriented companies such as Marathon Oil, Whiting Petroleum and Kodiak Oil & Gas.

"The positive outlook reflects our view that industry EBITDA will grow in the mid- to high-single digits year over the next one to two years. Stable oil and natural gas prices will enable E&P companies to continue to invest with confidence, driving production and cash flow higher," Miller added.

However, a lack of gathering, processing and transportation infrastructure will continue to plague the industry, though to a lesser extent than in the past couple of years. The completion of infrastructure improvements will unshackle production growth rates for companies such as Continental Resources and Oasis Petroleum in the Bakken Shale, and Range Resources and Antero Resources in the Marcellus Shale, according to Moody's.

Meanwhile, Fitch Ratings said fracking could help the European Union cut its reliance on Russian Gas. Germany's reported plan to lift a ban on fracking highlights one of several ways that European countries could reduce their reliance on Russian gas, it says.

Out of the major European oil and gas companies, Fitch reckons Total could have a head start over rivals if European shale gas production ramps up, because of the experience it has gained from investment in UK shale.

The group became the first Western oil major to invest in UK shale after agreeing to take a 40% stake in two licenses earlier this year. Total would also be well positioned if France followed Germany and decided to ease restrictions on shale gas production, as its home market is thought to have some of the largest shale gas reserves in Europe.

Jeffrey Woodruff, senior director at Fitch Ratings, said, “If European countries want to cut reliance on Russian gas, other potential routes include greater use of LNG. BG will be one of the first European companies to export LNG from the US, due to its participation in three of the six projects that have been approved by the US Department of Energy to export LNG.”

All of this is well and good, but as the Oilholic noted in a Forbes post earlier this month, Europeans need to be both patient and pragmatic. The US shale bonanza took 30 years to materialise meaningfully, Europe's is likely to take longer. Speaking of shale, here is one's take on why US shale would not hurt OPEC all that much, as legislative impediments prevent the US from exporting crude oil and by default do not give it the feel of a global bonanza. That's all from Vienna folks. Next stop Moscow, for the 21st World Petroleum Congress. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Exploration site in Kurdistan © Genel Energy

OPEC vibes, a Libyan matter & market chatter

As OPEC prepares to meet for the first time this year, oil ministers of the 12 member nations should feel reasonably content. The hawks always like the oil price to be in three figures and doves usually like a support level above the region of US$85 per barrel using Brent as a benchmark. Needless to say, both camps are sitting comfortably at the moment and will continue to do so for a while.

Macroeconomic permutations and risk froth is keeping the oil price where OPEC wants it, so the Oilholic would be mighty surprised if the ministers decide to budge from the present official quota cap of 30 million barrels per day. Those going long on Brent have already bet on OPEC keeping its output right where it is.

Over the week to May 27, bets on a rising price rose to their highest level since September 2013. ICE's Commitment of Traders report for the week saw all concerned, including hedge funds, increase their net long position in Brent crude by 6% (or 4,692) to 213,364 positions, marking a third successive week of increases. Going the other way, the number of short positions fell by 7,796 to 42,096.

Wires might be saying that "all eyes" are on OPEC, but not many eyes would roll at Helferstorferstrasse 17 once the announcement is made. Futures actually slipped by around 0.5% as dullness and a minor bout of profit taking set in last week at one point. While the quota level is a done deal, what ministers would most likely discuss, when those pesky scribes (and er...bloggers) have been ejected out for the closed door meeting, is how much China would be importing or not.

Several independent forecasters, including the US EIA have predicted that China is likely to become the largest net importer of oil in 2014. By some measures it already is, and OPEC ministers would like to ponder over how much of that Chinese demand would be met by them as US imports continue to decline.

Other matters of course pertain to the appointment of a successor to Secretary General Abdalla Salem El-Badri, and where OPEC stands on the issue of production in his home country of Libya, which is nowhere near the level recorded prior to the civil war.

In order to pick-up the Libyan pulse a little better ahead of the OPEC meet, yours truly headed to IRN/Oliver Kinross 3rd New Libya Conference late last month. The great and good concerned with Libya were all there – IOCs, Libyan NOC, politicians, diplomats and civil servants from UK and Libya alike.

A diverse range of stakeholders agreed that the race to reversing Libyan production back to health would be a long slow marathon rather than a short sprint. Anyone who says otherwise is being naively optimistic.

Forget geopolitics, several commentators were quick to point out that Libya has had no private sector presence in the oil & gas sector. Instead, until recently, it has had 40 years of a controlling Gaddafi fiefdom. Legislative challenges also persist, as one commentator noted: "The road map to a petroleum regime starts first with a constitution."

That's something newly-elected Prime Minister Ahmed Maiteg must ponder over as he tries to bring a fractured country together. Then there is the investment case scenario. Foreign stake-holding in Libyan concerns is only permitted up to 49% despite a risky climate; the Libyan partner must be the majority owner. The oil & gas business has always operated under risk versus reward considerations. But a heightened sense of risk is something not all investors can cope with as noted by Sir Dominic Asquith, former UK ambassador to Iraq, Egypt and Libya, who was among the delegates.

"There is a long term potential with a bright Libyan horizon on the cards. However, getting to it would be a difficult journey, and particularly so for small and medium companies with a lesser propensity to take risk on their balance sheets than major companies," he added.

Meanwhile, a UK Foreign & Commonwealth office spokesperson said the British Government was not changing travel advice to Libya for its citizens any time soon. "We advise against all but essential travel to the country and Benghazi remains off limits. In case of companies wishing to do business in Libya, we strongly urge them to professionally review their own security arrangements."

Combine all of these latent challenges with the ongoing shenanigans and its not hard to figure out why the nation has become one of the smallest producers among its 12 OPEC counterparts and it may be a while yet before investors warm up to it. However, amid the pessimism, there is some optimism too.

Ahmed Ben Halim, CEO of Libya Holdings Group noted that sooner rather than later, the Libyans will sort their affairs out, even though the journey would be pretty volatile. Fares Law Group's Yannil Belbachir pointed out that despite everything all financial institutions were functions normally. That's always a good starting point.

Some uber-optimists also expressed hope of making Libya a "solar power" by tapping sunlight to produce electricity, introduce it back into the grid and send it via subsea cable from Tripoli to Sicily. Noble cause indeed! Being more realistic and looking at the medium term, with onshore prospection and production getting disrupted, offshore Sirte exploration, first realised by Hess Corporation, could provide a minor boost. Everyone from BP to the Libyan NOC is giving it a jolly good try!

Just one footnote, before the Oilholic takes your leave and that's to let you all know that one has also decided to provide insight to Forbes as a contributor on 'crude' matters which can be accessed here; look forward to your continued support on both avenues. That's all from London for the moment folks; more shortly from sunny Vienna at the 165th meeting of OPEC ministers . Keep reading, keep it 'crude'!

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© Gaurav Sharma, 2014. Photo 1: OPEC HQ, Vienna, Austria. © Gaurav Sharma, 2014.