OPEC+ G20 = 'Crude' potpourri + V-shaped recovery

There have been umpteen developments over the last fortnight in the crude saga of oil producers scrambling to curtail production in light of the unprecedented drop in demand triggered by the coronavirus or Covid-19 outbreak.

That oil prices would have fallen regardless was a given, but the current desperate market situation was largely of Saudi Arabia and Russia's own making following the collapse of OPEC+ on March 6. 

Marking a reversal, frantic talks over the Easter weekend saw Moscow and Riyadh underpin a 9.7 million barrels per day (bpd) production cut, with feverish diplomacy by U.S. President Donald Trump and the promise of 1.5 million bpd in cuts by G20 oil producers serving as an accompaniment. Overall, the crude potpourri smelt better than it actually was. 

For the expected near-term oil demand decline is likely to be two to three times the production cut level. The deal itself doesn't look rock solid. As the Oilholic discussed with Mary-Ann Russon of the BBC, around 2.5 million bpd of cuts have been promised by Russia, an OPEC+ participant with a very poor record of compliance with the OPEC+ framework. 

The Saudis meanwhile would be cutting 2.5 million bpd from an inflated level of 11 million bpd. Prior to OPEC+'s December meeting, their production stood at 9.744 million bpd, which means in actual fact their compromise is closer to 1.25 million bpd on average. 

Yet for all of this, if oil demand is dire, any supply cut is only likely to have a very limited impact. We are flying, consuming and driving less (despite 99c/gallon prices in some US states) - so if we aren't going out that much, it won't matter one bit what OPEC+ does or doesn't. 

The deal is supposed to run from May to July and it won't avert short-term pain. It's come too late to rescue April, and it's too little for May and June. Hopes are pinned on a V-shaped recovery in oil prices come the middle of July. But how steep that 'V' might be is the question, and in the Oilholic's opinion it'll be steeper than where we are. 

As for The Donald, here is this blogger's take in a discussion with Marco Werman on PRI / BBC joint radio production The World. Phenomenal diplomacy it was by the President but more hot air was generated than tangible results. 

Additionally, the Oilholic also discussed various other market permutations, facets and shenanigans plus direction of oil and gas stocks, fuel prices, and several other energy topics with a host of industry colleagues including Richard Hunter of Interactive Investor, Freya Cole of BBC, Juliet Mann of CGTN, Victoria Scholar of IG Markets, Auskar Surbakti of TRT World, Sean Evers of Gulf Intelligence, Garima Gayatri of Energy Dias and scribbled half a dozen Forbes missives in what can only be described as the most manic of all manic fortnights for the oil market.

Final thoughts - WTI still looks like it'll hit mid-to-late-teens and continue to lurk below $20 per barrel  till early summer because dire demands means dire prices! That's about it for the moment folks! Stay safe, keep reading, keep it 'crude'!

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© Gaurav Sharma 2020. Photo I: Oilfield in Oman © Shell. Photo II: Gaurav Sharma on the BBC, TRT World and CGTN broadcasts © Broadcasters as mentioned, April 2020. 

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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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2019. Photo © Gaurav Sharma, 2019

The oil price rally that wasn’t

We were led to believe that a $100 per barrel oil price was not a case of "if" but "when." Over April, and early on in May both Brent and WTI futures continued their upticks, primarily driven by hedge funds piling into the front end of the futures curve, and OPEC hinting at extending its production cut agreement.

Even six-month dated Brent contract's backwardation streak started to narrow, though it ultimately stayed in backwardation mode, as the Oilholic noted in a recent broadcast. And then it happened – information came out that the Saudis and Russians were no longer keen on extending the existing OPEC/non-OPEC production cut agreement, that has seen 1.8 million barrels per day (bpd) taken out of the global supply pool by 14 OPEC and 10 non-OPEC producers. 

Furthermore, if a Reuters exclusive is to be believed, the US demanded that OPEC production be raised by 1 million bpd. The same story also claimed that President Donald Trump's unilateral slapping of sanctions on Iran only came after the Saudis allegedly promised to raise their output. 

Sidestepping all of this, the Oilholic has always maintained that the barrels OPEC and non-OPEC producers took out of the market to – in their words "balance the market" – had to return to the global supply pool at some point. That was the real "when not if" situation for the market.  

As market sentiment on that happening has gained traction, the predictable result is a visible correction in the futures market with OPEC set to meet on 22 June. Meanwhile, the $100 price remains a pipedream, with both benchmarks still oscillating in a very predictable $60-80 range, only occasionally flattering to deceive with bullish overtones only to slide backwards (see graph above, click to enlarge). 

Away from the crude price, here are one's Forbes posts on US oil producers maintaining their efficiencies drive despite relatively higher oil prices and the UK-France Channel Tunnel operator's latest sustainability initiative of using ozone friendly refrigerants for cooling it landmark tunnel. 

Finally, it's a pleasure to have the Oilholic mentioned and recognised by third parties. These include Feedspot who recently featured this blog in their ‘Top 60 oil and gas blogs to follow’ section. It comes after industry data provider Drillinginfo flagged this blog in its roundup of '10 great oil & gas blogs to follow', as did penny stocks expert Peter Leeds, and US-based Delphian Ballistics. A big thank you to all of the aforementioned. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2018. Graph: Friday closes of oil prices year to 8 June 2018 © Gaurav Sharma 2018.

Oil to touch $300/bbl? Are you having a laugh Pierre?

You have to hand it to hedge fund managers. At the sight of the slightest uptick in crude prices, whether driven by geopolitics, OPEC's shenanigans or dare we say – actual supply and demand dynamics – hedge funds and money managers tend to pile in with long calls in the hope of extending the rally. 

However, when it's a case of all of the above market factors, some tend to get overexcited. Pierre Andurand, whose Andurand Capital Management is often bullish on oil and has been down on its luck for the first quarter of 2018 (according to Bloomberg), is certainly among the excitable creatures.

Earlier this week, in a succession of now deleted tweets, Andurand quipped that concerns over the rise of electric vehicles was keeping investment in upstream oil projects muted thereby extending their lead times over fears of peak demand. 

"So paradoxically these peak demand fears might bring the largest supply shock ever. If oil prices do not rise fast enough, $300 oil in a few years is not impossible," he added. 

Having grabbed the attention of the crude markets, the tweets, of course, were subsequently deleted with no explanation. The Oilholic has an explanation – perhaps rational thinking returned? 

Perhaps a realisation that OPEC's lowering of output has to end at some point? Or perhaps a realisation that the US rig count continues to rise in tandem with American barrels? Or even perhaps a realisation that much of oil demand – as the International Energy Agency notes – is driven by petrochemicals and aviation. In fact, even if one in every two cars is electric, oil demand would still rise. 

Anyway, why should rationality get in the way of a provocative tweet. Or make that a deleted provocative tweet. 

For the record, the Oilholic reiterates his average oil forecast range of $65-75/bbl for Brent for 2018, which is a tad higher than that of many fellow bears in the range of $60-70/bbl, given there still is plenty of oil in the market, and the crude mix of light and heavy is keep the global pool well supplied.

To provide, some content the Brent front month contract closed just shy of $75/bbl on Friday (see chart above, click to enlarge), still in its painfully dull range, albeit lurking near the highest level since November 2014. So only another $225 to stack up in a matter of years Pierre, if the bears get your bullish fever! That's all for the moment folks! Keep reading, keep it ‘crude’!

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Oil, Tip TV & a ‘timely’ Bloomberg report

Brent continues to slip and WTI is along for the slide-ride too. Over the last two weeks, we’ve seen price floors getting lowered only to be breached again sooner than most expect. The Oilholic’s latest 5-day assessment saw both benchmarks as well as the OPEC basket of crudes end the week below US$90 per barrel on Friday.

One has been putting forward a short position argument on Brent since the summer to the readers of this blog and in columns for Forbes. As the tale goes, yours truly has pretty much got the call right, except for a few weeks over one month. Speculators, including but not limited to hedge funds, triumphed in June using the initial flare-up in Iraq as pretence for driving the futures price up. Market fundamentals were never going to support a price spike to $115, as was the case back then.

Those banking on backwardation were bound to get left holding barrels of paper crude on their books that they never needed in the first place for anything other than trading for profit. As the date of the paper contract got desperately close to where you might have to turn up with a tanker at the end of a pipeline, hedge funds that went long in June ended up collectively holding just shy of 600 million paper barrels on their books.

Smart, strategic buying by physical traders eyeing cargoes without firm buyers made contango set in hitting the hedge funds with massive losses. The week to July 15 then saw hedge funds and other speculators cut their long bets by around 25%, reducing their net long futures and options positions in Brent to 151,981 from 201,568 according to ICE.

Physical traders, had finally taught paper traders a long overdue lesson that you can’t cheat market fundamentals for very long. So it was a pleasure expanding upon the chain of thought and discuss other ‘crude’ matters with Nick 'the Moose' Batsford and his jolly colleagues at Tip TV, on October 6. Here’s a link to the conversation for good measure. 

Overall dynamic hasn’t altered from May. To begin with, of the five major global oil importers – China, India, Japan, US and South Korea – importation by four of the aforementioned is relatively down, with India being the odd one out going the other way. Secondly, if an ongoing war in the Middle East is unable to perk-up the price, you know the macroeconomic climate remains dicey with the less said about OECD oil demand the better.

Thirdly, odd as it may seem, while Iraqi statehood is facing an existential threat, there has been limited (some say negligible) impact on the loading and shipment of Basra Light. This was the situation early on in July and pretty much remains the case early October. There is plenty of crude oil out there while buyers are holding back.

Now if anything else, hedge funds either side of the pond have wised up considerably since the July episode. Many of the biggest names in the industry are net-short and not net-long at present, though some unwisely betting on the ‘only way is long’ logic will never learn. Of course, Bloomberg thinks the story is going. One has always had a suspicion that the merry team of that most esteemed data and newswire service secretly love this blog. Contacts at SocGen, Interactive Brokers and a good few readers of ADVFN have suggested so too.

Ever since the Oilholic quipped that hedge funds had been contangoed and went on to substantiate it on more than one occasion via broadcast or print, this humble blog has proved rather popular with ‘Bloomberg-ers’ (see right, a visit earlier this week). Now take this coincidental October 6 story, where Bloomberg claims "Tumbling Oil Prices Punish Hedge Funds Betting on Gains."

Behind the bold headline, the story doesn’t tell us how many hedge funds took a hit or the aggregate number of paper barrels thought to be on their books. Without that key information, the story and its slant are actually a meaningless regurgitation of an old idea. Let’s face it – ideas are not copyrighted. Some hedge fund somewhere will always lose money on a trading call that went wrong, but what’s the big deal, what’s new and where’s the news in the Bloomberg story? Now what happened in July was a big deal.

The 4.1% jump in net-long positions as stated in the Bloomberg report, only for the Saudis to adjust their selling price and cause a further oil price decline, does not signify massive blanket losses for the wider hedge funds industry. Certainly, nothing on July’s loss scale has taken place over the last four weeks either for the WTI or Brent, whether we use ICE or CFTC data.

So here’s some advice Bloomberg if you really feel like probing the matter meaningfully. In the style of Mr. Wolf from Pulp Fiction, if the Oilholic “is curt here, it’s because time is a factor” when putting these things together, “so pretty please with sugar on top” - 

(a) Try picking up the phone to some physical traders of the crude stuff, as price aggregators do, in order to get anecdotal evidence and thoughts based on their internal solver models, not just those who pay way too much for expensive data terminals and have never felt or known what a barrel of crude oil looks like. It'll help you get some physical market context. 

(b) Reconcile at least two months of CFTC or ICE data either side of the pond to get a sense of who is electronically holding what. 

(c) Take the aggregated figure of barrels held at a loss/profit to previous month as applicable, be bold and put a round figure estimate on what hedge funds might well be holding to back up loss/profit slant.

Or (d) if you don’t have the tenacity to do any of the above, email the Oilholic, who doesn’t fix problems like Mr. Wolf, but doesn’t bite either. In the meantime of course, we can keep ourselves fully informed with news about Celine Dion’s whereabouts (see above left, click to enlarge), as Will Hedden of IG Group noted in a recent tweet – the kind of important market moving news that reminds us all how good an investment a Bloomberg terminal is! That’s all for the moment folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo 1: Shell Oil Rig, USA © Shell. Photo 2: Bloomberg's visit to the Oilholic, Oct 6, 2014 © Gaurav Sharma. Photo 3: Bloomberg Terminal with Celine Dion flashes © Will Hedden, IG Group, August 2014.

Brent’s flat feeling likely to linger

It’s been that sort of a month where the Brent futures contract seems to set record low after low in terms of recent trading prices. Earlier this week, we saw the price plummet to a 26-month low and lurk above US$102 per barrel level remaining largely flat. In the Oilholic’s opinion there is room for further connection yet.

The only reason the price has stayed in three figures is down to demand from refineries in India and China, met largely by West African crude. The jury is still out on whether a $100 price floor is forming, something which is not guaranteed. Macroeconomic climate remains a shade dicey and much might depend on how China’s fares.

With the Brent prices falling 5.6% in month over month terms, last week Bloomberg reported that Chinese refiners bought 40 cargoes of West African crude to load in September, equating to about 1.27 million barrels a day. As the Indians bought another 27 cargoes over the biggest monthly drop in prices since April 2013, the total volume purchased lent support to the price or the $100 floor would have almost certainly been breached. Geopolitics is not providing that much of a risk driven bearish impetus, even hedge funds have finally realised that by reducing bullish bets on Brent by 12.5% to just 63,079 contacts in the week beginning August 19, as wiser heads appear to be prevailing of late.

From price of the crude stuff to those trying to make money on it – as some in the UK oil & gas sector have suggested that London-listed exploration and production (E&P) firms might be down the dumps. Investec analyst Brian Gallagher clearly isn’t one of them. In a note to clients, he said the sector should not be feeling sorry for itself. 

“Brent has been above $100 per barrel all year and broadly above $100 per barrel for three years now. Performance of E&P companies generally has just not been up to the mark from an operational and exploration perspective. Unique events have also disrupted narratives. Valuations are however becoming tempting again and we maintain bullish views on Amerisur and Cairn.”

Aside from these two, market valuations are still pricing in exploration barrels, which Investec analysts don’t necessarily disagree with. “Nevertheless, if you want to trade discovered barrels, you’ll have to wait for lower levels in Amerisur, Genel, Ophir and Tullow, in our view,” Gallagher added.

Sticking with corporates, here’s the Oilholic’s latest interview for Forbes with Barbara Spurrier, Finance Director of London’s AIM-listed Frontier Resources on the subject of potential barrels in Oman’s Block 38. Yours truly also recently interviewed Alexis Bédeneau, Head of IT at Primagaz France, a company owned by international conglomerate SHV Group on the crucial subject of cybersecurity and IT process streamlining within the oil & gas sector.

Finally, a Fitch Ratings report titled “European Union has Little Chance of Cutting Reliance on Russian Gas” rather gives away the concluding argument. The agency opines that Europe is unlikely to be able to reduce its reliance on Russian natural gas for at least the next decade and potentially much longer. 

“At best the EU may be able to avoid significantly increasing its gas purchases from Russia. Any attempt to improve energy security by reducing European reliance on Russia would require either a significant reduction in overall gas demand or a big increase in alternative sources of supply, but neither of these appears likely,” Fitch said.

European shale gas remains in its infancy and Fitch believes it will take “at least a decade” for production to reach meaningful volumes. By that point, of course it would probably only offset the decline in production from Europe's conventional gas wells and won’t be a US-style bonanza some are imagining. 

Piped gas imports to Europe from markets other than Russia are also likely to remain limited. Fitch opined that the Trans Anatolian Natural Gas Pipeline is the only viable non-Russian pipeline under consideration. This could provide 31 billion cubic metres of gas per annum by 2026, but that’s not enough to cover the incremental increase in gas demand the agency expects over the period, let alone replace any supplies from Russia!

Additionally LNG supplies will rise, but the market is unlikely to be large enough to gain market share against Russian gas. A candid and brutal assessment, just the sort this blogger likes, but maybe not the policymakers with camera facing soundbites in Brussels. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo: Oil tanker in Bosphorus, Istanbul, Turkey © Gaurav Sharma, March 2014.

Not that taut: Oil markets & geopolitical tension

The month of August has brought along a milestone for the Oilholics Synonymous Report, but let’s get going with crude matters for starters as oil markets continue to resist a risk premium driven spike.

The unfolding tragedy in Iraq, Libya’s troubles, Nigerian niggles and the fear of Ebola hitting exploration and production activity in West Africa, are more than enough to provide many paper traders with the pretext to go long and spook us all. Yet, the plentiful supply and stunted OECD demand scenario that’s carried over from last month has made geopolitical tension tolerable. As such its not percolating through to influence market sentiment in any appreciable fashion, bringing about a much needed price correction.

It wasn’t the news of US air strikes on ISIS that drove Brent down to a nine month low this week, rather the cautious mood of paper traders that did it. Among that lot were hedge fund guys n’ gals who burnt their fingers recently on long bets (that backfired spectacularly in July), and resisted going long as soon as news of the latest Iraqi flare-up surfaced, quite unlike last time.

According to ICE data, hedge funds and other money managers reduced net bullish bets on Brent futures to 97,351 contracts in the week to August 5; the lowest on books since February 4. Once bitten, twice shy and you all know why. Brent price is now comfortably within the Oilholic’s predicted price range for 2014.

Away from pricing, the other big news of course is about the megamerger of Kinder Morgan Inc (KMI), Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners Operating (EPBO), into one entity. The $71 billion plus complicated acquisition would create the largest oil and gas infrastructure company in the US by some distance and the country’s third-largest corporation in the sector after ExxonMobil and Chevron.

Moody’s, which has suspended its ratings on the companies for the moment, says generally the ratings for KMP and its subsidiaries will be reviewed for downgrade, and the ratings for KMI and EPBO and their subsidiaries will be reviewed for upgrade.

Stuart Miller, Moody's Vice President and Senior Credit Officer, notes: "KMI's large portfolio of high-quality assets generates a stable and predictable level of cash flow which could support a strong investment grade rating. However, because of the high leverage along with a high dividend payout ratio, we expect the new Kinder Morgan to be weakly positioned with an investment grade rating."

Sticking with Moody’s, following Argentina’s default on paper, the agency has unsurprisingly changed its outlook on the country’s major companies from stable to negative. Those affected in the sector include YPF. However, Petrobras Argentina and Pan American Energy Argentina were spared a negative outlook given their subsidiary status and disconnect from headline Argentine sovereign risk.

Switching tack from ratings notes to a Reuters report, a recent one from the newswire noted that the volume of US crude exports to Canada now exceeds the export level of OPEC lightweight Ecuador. While the Oilholic remains unconvinced about US crude joining the global crude supply pool anytime soon, there’s no harm in a bit of legally permitted neighbourly help. Inflows and outflows between the countries even things out; though Canadian oil exports going the other way are, and have always been, higher.

On the subject of reports, here’s the Oilholic’s latest quip on Forbes regarding the demise of commodities trading at investment banks and another one on the crucial subject of furthering gender diversity in the oil and gas business. 

Finally, going back to where one began, it is time to say a big THANK YOU to all you readers out there for your encouragement, criticism, feedback, compliments (as applicable) and the time you make to read this blogger’s thoughts. Though ever grateful, one feels like reiterating the gratitude today as Google Analytics has confirmed that US readers have overtaken the Oilholic's ‘home’ readers as of last month.

It matters as this humble blog has moved from 50 local clicks in December 2009 to 148k global clicks (and counting) this year and its been one great journey. The US, UK and Norway are currently the top three countries in terms of pageviews in that order (see right), followed by China, Germany, Russia, Canada, France, India and Turkey completing the top ten. Traffic also continues to climb from Australia, Brazil, Benelux, Hong Kong, Japan and Ukraine; so onwards and upwards to new frontiers with your continuing support. Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo: Oil rig, USA © Shell. Graphics: Oilholics Synonymous Report, July 2014 clickstats © Google Analytics

Hedge Funds have been ‘contangoed’

Recent events may have pushed the Brent front month futures contract back towards US$108 per barrel; but there's no denying some have been 'contangoed'! Ukrainian tensions and lower Libyan production are hard to ignore, even if the latter is a bit of a given.

Nonetheless, for a change, the direction of both benchmark prices this month indicates that July did belong to the physical traders with papers traders, most notably Hedge Funds, taking a beating.

It's astonishing (or perhaps not) that many paper traders went long on Brent banking on the premise of "the only way is up" as the Iraqi insurgency escalated last month. The only problem was that Iraqi oil was still getting dispatched from its southern oil hub of Basra despite internal chaos. Furthermore, areas under ISIS control hardly included any major Iraqi oil production zone.

After spiking above $115, the Brent price soon plummeted to under $105 as the reality of the physical market began to bite. It seems European refiners were holding back from buying the expensive crude stuff faced with declining margins. In fact, North Sea shipments, which Brent is largely synced with, were at monthly lows. Let alone bothering to pull out a map of Iraqi oilfields, many paper traders didn't even bother with the ancillary warning signs.

As Fitch Ratings noted earlier this month, the European refining margins are likely to remain weak for at least the next one to two years due to overcapacity, demand and supply imbalances, and competition from overseas. Over the first half of 2014, the northwest European refining margin averaged $3.3 per barrel, down from $4 per barrel in 2013 and $6.8 barrel in 2012.

Many European refineries have been loss-making or only slightly profitable, depending on their complexity, location and efficiency. They are hardly the sort of buyers to purchase consignments by the tanker-load during a mini bull run. The weaker margin scenario itself is nothing new, resulting from factors including a stagnating economy and the bias of domestic consumption towards diesel due to EU energy regulations

"This means that surplus gasoline is exported and the diesel fuel deficit is filled by imports, prompting competition with Middle Eastern, Russian and US refineries, which have access to cheaper feedstock and lower energy costs on average. Mediterranean refiners are additionally hurt by the interruption of oil supplies from Libya, but this situation may improve with the resumption of eastern port exports," explains Fitch analyst Dmitry Marinchenko.

Of course tell that to Hedge Funds managers who still went long in June collectively holding just short of 600 million paper barrels on their books banking on backwardation. But thanks to smart, strategic buying by physical traders eyeing cargoes without firm buyers, contango set in hitting the hedge funds with massive losses.

When supply remains adequate (or shall we say perceived to be adequate) and key buyers are not in a mood to buy in the volumes they normally do down to operational constraints, you know you've been 'contangoed' as forward month delivery will come at a sharp discount to later contracts!

Now the retreat is clear as ICE's latest Commitments of Traders report for the week to July 15 saw Hedge Funds and other speculators cut their long bets by around 25%, reducing their net long futures and options positions in Brent to 151,981 from 201,568. If the window of scrutiny is extended to the last week of June, the Oilholic would say that's a reduction of nearly 40%.

As for the European refiners, competition from overseas is likely to remain high, although Fitch reckons margins may start to recover in the medium term as economic growth gradually improves and overall refining capacity in Europe decreases. For instance, a recent Bloomberg survey indicated that of the 104 refining facilities region wide, 10 will shut permanently by 2020 from France to Italy to the Czech Republic. No surprises there as both OPEC and the IEA see European fuel demand as being largely flat.

Speaking of the IEA, the Oilholic got a chance earlier this month to chat with its Chief Economist Dr Fatih Birol. Despite the latest tension, he sees Russian oil & gas as a key component of the global energy mix (Read all about it in The Oilholic's Forbes post.)

Meanwhile, Moody's sees new US sanctions on Russia as credit negative for Rosneft and Novatek. The latest round of curbs will effectively prohibit Rosneft, Novatek, and other sanctioned entities, including several Russian banks and defence companies, from procuring financing and new debt from US investors, companies and banks.

Rosneft and Novatek will in effect be barred from obtaining future loans with a maturity of more than 90 days or new equity, cutting them off from long-term US capital markets. As both companies' trade activities currently remain unaffected, Moody's is not taking ratings action yet. However, the agency says the sanctions will significantly limit both companies' financing options and could put pressure on development projects, such as Novatek's Yamal LNG.

No one is sure what the aftermath of the MH17 tragedy would be, how the Ukrainian crisis would be resolved, and what implications it has for Russian energy companies and their Western partners. All we can do is wait and see. That's all for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Oil pipeline © Cairn Energy

Crude reality: Time to short as bulls go lethargic?

Most of the Oilholic's contacts in City trading circles had been maintaining in recent months that a US$106 per barrel price would be the psychological floor to the year-end, barring bearish trends induced by a wider and unforeseen macroeconomic tsunami.

To be quite honest, the global economy is probably where it has been for a while – in a bit of a lull. So even though things are neither materially better nor all that worse, the level was still breached this Monday morning. Methinks there is going to be further selling and yet more shorting either side of the Atlantic.

Our old friends the hedge funds – held responsible by many for the assetization of black gold – certainly seem to think so. That's if you believe data published by ICE Futures Europe. It indicates speculative bets that the Brent price will rise (in futures and options combined), outnumbered short positions by 119,451 lots in the week ended October 29.

The London-based exchange says that's a reduction of 21% (or 30,710 contracts) from the previous week and the biggest drop since the week ended June 25. Concurrently, bearish positions on Brent outnumbered bullish wagers by 321,470; a 3.2% decrease in net-short positions from October 22. So there you have it!

On a related note, albeit for different reasons, the WTI also closed at its lowest since June 26. In fact the forward month futures contract for December shed as much as 55 cents to $94.06 at one point in intraday trading on Monday.

The Oilholic believes the prices aren’t plummeting; rather they are hitting a much more realistic level. Such a sentiment was echoed by two new supply-side contacts this blogger had the pleasure of running into at the UK business lobby group CBI's 2013 annual conference.

As 2014 is nearly upon us, Steven Wood, managing director (corporate finance) at Moody's, says oil prices should stay robust through next year. His and Moody's quantification of robustness for Brent, factoring in Chinese demand and tensions in the Middle East, stands at around $95 per barrel, and West Texas Intermediate "for slightly less, in the next one to two years."

"And with the worst behind the US natural gas industry, prices for benchmark Henry Hub will average about $3.75 per thousand cubic feet next year," he adds.

Additionally, the good folks at Moody's reckon the E&P sector's fortunes will continue to rise over the next year, with big capital spending budgets keeping fundamentals strong (also for the oilfield service and drilling sector).

One minor footnote though, even if it is still some way off – what if international sanctions on Iran get eased should relations between the Islamic Republic and the West improve? We could then see the Iran add over 750,000 barrels per day to the global oil output pool. Undoubtedly, this would be bearish for oil markets, especially so for Brent. The recent dialogue between both sides has made contemplating the possibility possible!

Away from price-related issues, if you needed any further proof of renewed vigour in North Sea E&P activity, then Norway's Statoil has announced it will go ahead with a decision to build a new platform at its Snorre field to extract another 300 million barrels of the crude stuff at an expense of £4.2 billion. This would, according to the Norwegian media, extend the project's lifetime to 2040.

Statoil will take a final decision on engineering aspects in the first quarter of 2015 with the platform scheduled to come onstream in the fourth quarter of 2021. The Norwegian firm owns 33.3% of the exploration project licence. Other shareholders include Petoro (30%), ExxonMobil (17.4%), Idemitsu Petroleum (9.6%), RWE (8.6%) and Core Energy (1.1%). That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2013. Photo: North Sea oil rig © Cairn Energy plc

The WTI rally, hubris, hedge funds & speculators

The 24-7 world of oil futures trading saw Brent and WTI benchmarks draw level this weekend. In fact, the latter even traded at a premium of more than a few cents for better parts of an hour at one point.

After having traded at a discount to Brent for three years, with the spread reaching an all time high of around US$30 at one point (in September 2011), the WTI’s turnaround is noteworthy. However, the commentary that has followed from some quarters is anything but!

Some opined, more out of hubris than expertise, that the WTI had reclaimed its status as the world’s leading benchmark back from Brent. Others cooed that the sread’s shrinkage to zilch, was America’s way of sticking up two fingers to OPEC. The Oilholic has never heard so much [hedge funds and speculative trading inspired] tosh on the airwaves and the internet for a long time.

Sticking the proverbial two fingers up to OPEC from an American standpoint, should involve a lower WTI price, one that is price positive for domestic consumers! Instead we have an inflated three-figure one which mirrors geopolitically sensitive, supply-shock spooked international benchmarks and makes speculators uncork champagne.

Furthermore, if reclaiming 'world status' for a benchmark brings with it higher prices at the pump – is it really worth it? One would rather have a decoupled benchmark reflective of conditions in the backyard. An uptick in US oil production, near resolution of the Cushing glut and the chalking of a path to medium term energy independence should lead the benchmark lower! And that’s when you stick two fingers up to foreign oil imports.

So maybe mainstream commentators stateside ought to take stock and ask whether what’s transpired over the weekend is really something to shout about and not let commentary inspired by speculators gain traction.

Looking at last Friday’s instalment of CFTC data, it is quite clear that hedge funds have been betting with a near possessed vigour on the WTI rally continuing. Were the holdings to be converted into physical barrels, we’d be looking roughly around 350 million barrels of crude oil! That’s above the peak level of contracts placed during the Libyan crisis. You can take a wild guess the delivery won’t be in The Hamptons, because a delivery was never the objective. And don’t worry, shorting will begin shortly; we’re already down to US$106-107.

The Oilholic asked seven traders this morning whether they thought the WTI would extend gains – not one opined that it would. The forward month contract remains technically overbought and we know courtesy of whom. When yours truly visited the CBOT earlier this year and had a chat at length with veteran commentator Phil Flynn of Price Futures, we both agreed that the WTI’s star is on the rise.

But for that to happen, followed by a coming together of the benchmarks – there would need to be a "meeting in the middle" according to Flynn. Meaning, the relative constraints and fundamentals would drive Brent lower and WTI higher over the course of 2013. What has appened of late is nothing of the sort.

Analysts can point to four specific developments as being behind the move - namely Longhorn pipeline flows (from the Permian Basin in West Texas to the USGC, bypassing Cushing which will be ramping up from 75 kbpd in Q2 to the full 225 kbpd in Q3), Permian Express pipeline Phase I start-up (which will add another 90 kbpd of capacity, again bypassing Cushing), re-start of a key crude unit at the BP Whiting refinery (on July 1 which allows, mainly WTI sweet, runs to increase to full levels of 410 kbpd) and finally shutdowns associated with the recent flooding in Alberta, Canada. 

But as Mike Wittner, global head of oil research at Société Générale, notes: "Everything except the Alberta flooding – has been widely reported, telegraphed, and analysed for months. There is absolutely nothing new about this information!"

While it is plausible that such factors get priced in twice, Wittner opined that there still appear to be "some large and even relatively new trading positions that are long WTI, possibly CTAs and algorithmic funds."

In a note to clients, he added, that even though fundamentals were not the only price drivers, "they do strongly suggest that WTI should not strengthen any further versus the Louisiana Light Sweet (LLS) and Brent."

Speaking of algorithms, another pack of feral beasts are making Wall Street home; ones which move at a 'high frequency' if recent evidence is anything to go by. One so-called high frequency trader (HFT) has much to chew over, let alone a total of $3 million in fines handed out to him and his firm.

Financial regulators in UK and US found that Michael Coscia of Panther Energy used algorithms that he developed to create false orders for oil and gas on trading exchanges in both countries between September 6, 2011 and October 18, 2011. Nothing about supply, nothing about demand, nothing do with market conditions, nothing to do with the pride of benchmarks, just a plain old case of layering and spoofing (i.e. placing and cancelling trades to manipulate the crude oil price).

You have to hand it to these HFT guys in a perverse sort of a way. While creating mechanisms to place, buy or sell orders, far quicker than can be executed manually, is an act of ingenuity; manipulating the market is not. Not to digress though, Coscia and Panther Energy have made a bit of British regulatory history. The fine of $903,176 given to him by UK's Financial Conduct Authority (FCA) was the first instance of a watchdog this side of the pond having acted against a HFT.

Additionally, the CFTC fined Coscia and Panther Energy $1.4 million while the Chicago Mercantile Exchange fined them $800,000. He’s thought to have made $1.4 million back in 2011 from the said activity, so it should be a $3 million lesson of monetary proportions for him and others. Or will it? The Oilholic is not betting his house on it!

Away from pricing matters, a continent which consumes more than it produces – Asia – is likely to see piles of investment towards large E&P oil and gas projects. But this could pressure fundamentals of Asian oil companies, according to Moody’s.

Simon Wong, senior credit officer at the ratings agency, reckons companies at the lower end of the investment-grade rating scale will, continue to face greater pressure from large debt-funded acquisitions and capital spending."

"Moreover, acquisitions of oil and gas assets with long development lead time are subject to greater execution delays or cost overruns, a credit negative. If acquisitions accelerate production output and diversify oil and gas reserves, then the pressure from large debt-funded acquisitions will reduce," Wong added.

Nonetheless, because most Asian oil companies are national oil companies (NOCs) - in which governments own large stakes and which often own or manage their strategic resources of their countries – their ratings incorporate a high (often very high) degree of explicit or implied government support.

The need for acquisitions and large capital-spending reflects the fact that Asian NOCs are under pressure to invest in order to diversify their reserves geographically. Naming names, Moody’s made some observations in a report published last week.

The agency noted that three companies – China National Petroleum Corporation, Petronas (of Malaysia) and ONGC (of India) – have very high or high capacity to make acquisitions owing to their substantial cash on hand (or low debt levels). The trio could spend over $10 billion on acquisitions in addition to their announced capex plans without hurting their respective underlying credit quality.

Then come another four companies – CNOOC (China), PTT Exploration and Production Public (Thailand), Korea National Oil Corp (South Korea) and Sinopec (China) – that have moderate headroom according to Moody’s and can spend an additional $2 billion to $10 billion. These then are or rather could be the big spenders.

Finally, if Nigeria’s crude mess interests you – then one would like to flag-up a couple of recent articles that can give you a glimpse into how things go in that part of the world. The first one is a report by The Economist on the murky world encountered by Shell and ENI in their attempts to win an oil block and the second one is a Reuters’ report on how gasoline contracts are being ‘handled’ in the country. If both articles whet your appetite for more, then Michael Peel’s brilliant book on Nigeria’s oil industry, its history and complications, would be a good starting point. And that's all for the moment folks. Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: Pipeline in Alaska, USA © Michael S. Quinton / National Geographic. Photo 2: Oil drilling site, North Dakota, USA © Phil Schermeister / National Geographic. 

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.

BP fishes, ETP swoops & Chesapeake stumbles

Three corporate stories have caught the Oilholic’s eye over the past fortnight and all are worth talking about for very different reasons. With things improving Stateside and memories of a Russian misadventure fading, oil major BP announced on Tuesday that it had inked two production sharing agreements and aims to begin new deepwater exploration in Atlantic waters off the coast of Trinidad and Tobago. The company is already the Caribbean island nation’s largest oil & gas producer with average production for 2011 coming in the region of 408,000 barrels of oil equivalent per day.

Having been awarded blocks 23(a) and TTDAA14 in the 2010-2011 competitive bid rounds last summer, BP finds itself fishing for crude and gassy stuff in the two blocks which are 2,600 sq km and 1,000 sq km in area respectively. Local sources see the company as a ‘good corporate citizen’ and that ought to be comforting for BP in its march to rebuild trust under Bob Dudley.

While BP’s fishing, Energy Transfer Partners LP (ETP) is smiling having won plaudits around the crude world for its US$5.3 billion acquisition of Sunoco on April 30. A fortnight hence, market commentators are still raving on about the move especially as ETP’s swoop for Sunoco follows on from a clever buyout of Southern Union for US$5.7 billion. These acquisitions make ETP the USA’s second-biggest owner of pipeline assets behind Kinder Morgan whose merger with El Paso is imminent.

Most importantly, the Oilholic believes a swoop for Sunoco diversifies ETP’s pipeline portfolio adding around 9,700 km of oil and refined products pipelines to its existing network of 28,160 km of natural gas and natural gas liquids pipelines. With the move, oil revenues will account for over a quarter of its income. A Moody’s report prior to announcement of the deal suggested that together with Enterprise Production Partners, ONEOK Partners and Williams Partners, ETP was currently in a good place and among those best positioned for organic growth.

Growing production of oil, natural gas and natural gas liquids and higher margins are driving increased earnings and cash flow for midstream companies, especially those with existing gathering and processing or pipeline infrastructure near booming shale plays says the agency. While ETP’s smiling, the situation at Chesapeake Energy is anything but smiles. Under Aubrey McClendon, who co-founded the firm in 1989 in Oklahoma, it grew from strength to strength becoming the USA’s second largest natural gas producer and a company synonymous with the country’s shale gas bonanza. However, in a troubling economic climate with the price of natural gas plummeting to historic lows, Chesapeake has endured terrible headlines many of which were self-triggered.

Two weeks ago activist shareholders forced McClendon’s hand by making him relinquish the post of Chairman which he held along with that of Chief Executive over an arrangement which allows him to buy a 2.5% stake in all new wells drilled by Chesapeake. The arrangement itself will also be negotiated by 2014. The Oilholic finds the way McClendon has been treated to be daft for a number of reasons.

The arrangement has been in place since 1993 when the firm went public so neither the company’s Board nor its shareholders can claim they did not know. Two decades ago Chesapeake drilled around 20 wells per annum on average but by 2011 the average had risen to well above 1500 wells. That McClendon kept putting his money where his mouth is for so long is itself astonishing which is what the attention should focus on rather than on the man himself.

In later years this was largely achieved by borrowing at a personal level to the tune of US$850 million; Reuters reckons the figure is more in the region of US$1.1 billion. However, sections of the US media are currently busy sensationalising the Oklahoma man’s tussles within the company and as if this arrangement has emerged out of the blue.

Furthermore, the macroclimate and falling gas prices are now forcing the energy company’s hand with analysts at Fitch Ratings noting that it faces a funding shortfall of US$10 billion this year. In response, Chesapeake says it plans to sell US$9.0 billion to US$11.5 billion in assets this year. Word from Houston is that the sales of its Permian Basin property in West Texas and Mississippi Lime joint venture are a given by September. Some analysts believe asset sales may cap the figure of US$14 billion; though the view is not unanimous.

While this would help with liquidity issues, a sell-off of those assets currently producing oil & gas would most certainly reduce Chesapeake’s cash flow needed to meet requirements of its existing US$4 billion corporate credit facility secured earlier this week from Goldman Sachs and Jeffries Group. It matures in December 2017, with an interest rate of around 8.5% and can be repaid at any time over 2012 without penalty at par value.

As expected, Chesapeake has suffered a ratings downgrade; Standard & Poor's lowered its credit rating to "BB-" from "BB" citing corporate governance matters and a widening gap between capex and operating cash flow as the primary reasons. There is clear evidence of hedge funds short-selling Chesapeake’s shares.

Industry veteran and founder of BP Capital Partners – T. Boone Pickens – launched a strange albeit very vocal defence of McClendon on CNBC’s US Squawk Box on Wednesday which made yours truly smile. Pickens admitted that he had sold his position on Chesapeake – not because of what is going on but rather that he was very concerned about natural gas prices full stop.

“We got out of natural gas stocks and Chesapeake was one of them. We’re not long on Chesapeake now. Aubrey (McClendon) is a great Oklahoman and Chesapeake is a great company for Oklahoma City generating jobs and investment. Aubrey is a visionary…don’t bet against him…They’ll pull it off. You bet against Aubrey and you’ll scratch your loser’s ass,” said the industry veteran.

You have got to hand it to Pickens! If he's got something to say, there is no minding of the "Ps" and "Qs" – so what if its live television! As a former CNBC employee, the Oilholic wholeheartedly enjoyed Pickens’ soundbite and agrees that Chesapeake should make it out of this mess! However, bad headlines won’t go away anytime soon and its partly their own fault. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pipeline warning sign, Fairfax, Virginia, USA © O. Louis Mazzatenta/National Geographic. Photo 2: Chesapeake well drilling site © Chesapeake Energy.