In Houston Town To Trump's Iranian Frowns

The Oilholic is back in Houston, Texas for another round of events and networking. However, getting stuck in one's hotel room watching CNN on a sunny Texan afternoon certainly wasn't part of the plan.

Of course, with US President Donald Trump taking on himself to single-handedly tearing up the Iran Nuclear deal, there was little choice but add to the afternoon news-watchers ranks. 

And with customary aplomb, the Donald annulled the US end of a "very bad deal" with Tehran at 2pm Eastern. It's something he had always criticised, and had promised he'd annul if he won the Presidency. So, the Oilholic wonders, why is the market surprised? 

Here are one's thoughts on what the President's move could mean for the global supply and demand dynamic via a Forbes post. In fact, Moody's Analytics reckons Trump's sanctions have the power to knock off 400,000 barrels per day (bpd) of Iranian crude off the global market. 

But given the President's move is unilateral, unlike Barack Obama's multilateral sanctions, the volume would be less than half of what his predecessor managed inflict on the Iranian before they came to the table (i.e. 1 million bpd).

Of course, both leading up to and in the hours after Trump's announcement, both Brent and WTI fell by as much as 3% only to gain 2%, before ending the day firmly on a bullish note. While this blogger is not offering investment advice, a bit of caution is advised.

The Oilholic, for the moment is minded to stick to his average Brent price forecast range of $65-75 per barrel. These are early days, much needs to unfold here. But that's all for the moment from Houston folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2018. Photo: Billboard in Houston, Texas, USA © Gaurav Sharma, May 2018. 

Japan’s return to Iranian market ‘complicated’

The Oilholic is back in Tokyo, some 6,000 miles east of London, and is finding Japan Inc. rather content with a crude oil buyers’ market. In fact, if anything, even the relatively higher oil price, has fallen to a third of the level this blogger noted when he was last here (in September 2014).

One outstanding issue – of re-establishing ties with the Iranian market – remains ‘complicated’ to quote analysts and legal professionals in the Japanese capital. Up until 2006, the point of the first wave of stringent UN sanctions on Iran against its nuclear programme, Tokyo enjoyed good ties with Tehran, symbolised first among other things by its stake in the Islamic republic’s Azadegan oilfield. 

However, that was then, and by 2010 matters progressively worsened as the US and European Union moved to impose yet more stringent sanctions on Iran following an escalation of Tehran’s nuclear ambitions, and the West’s wariness of it. 

Subsequently, Japan duly shunned Iran in wake of international sanctions, even if it wasn’t easy for the largest liquefied natural gas importer and third-largest net importer of crude oil and oil products in the world to do so. Following Iran’s return to the international fold and a lifting of international sanctions, unsurprisingly Japan’s government was among the first to follow China in resuming ties with the country’s oil and gas sector, and the wider economy. 

In February, a framework was also put in place under which Tehran would guarantee $10 billion in investment projects financed by the coveted Japan Bank for International Cooperation (JBIC) and insured by Nippon Export and Investment finance. There’s one nagging problem though – the US is yet to fully lift its sanctions on Tehran and that makes Japanese banks, heavily intertwined with American financial system, wary of participating.

Unless commercial banks participate and capital flow mechanisms are established, JBIC cannot finance a project. And in any case an international remittance system needs to work, and major commercial banks, not just Japanese ones, need to resume normal operation before things can get off the ground. Not much of that has happened. 

Experts at law firm Baker & McKenzie’s Tokyo office say the appetite for investment in Iran is definitely there, yet very few Japanese companies have actually signed deals on account of risk associated with falling foul of US sanctions. 

Of course, leading law firms are ever willing to conduct due diligence to protect their clients’ foray into Iran. Furthermore, Washington has lifted sanctions on non-US banks, but nothing is quite so straightforward.

Partial US sanctions require anyone international banks deal with in Iran is not on the US Treasury’s “Specially Designated Nationals” (SDN) roster. The sanctions also cover any company that’s 50% or over 50% owned by an entity or person blocked by the US State Department, even if the company in question is not on the Treasury Department’s SDN roster. 

The only ‘crude’ saving grace is that a stagnant Japanese economy’s demand for oil is at its lowest since 1988, while glut troubled suppliers are queuing up twice over to sell their cargo at discounted prices. Given current oil and gas market permutations, the headache is as much Iran’s to contend with. That’s all from Tokyo for the moment folks. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Tokyo Skyline from Sumida River ferry, Tokyo, Japan © Gaurav Sharma, March 2016.

Crude take: $60 Brent price is (still) about right

Does the Iranian nuclear settlement make a $60 per barrel Brent price seem too optimistic as a median level for the current year - that's the question on most oil market observers' minds. Even before delving into City chatter, the Oilholic believes the answer to that question in a word is ‘no’.

For starters, the settlement which had been on the cards, has already been priced in to a certain extent despite an element of unpredictability. Secondly, as yours truly noted in a Forbes column - it will take better parts of 12 months for Iran to add anywhere near 400,000 barrels per day (bpd), and some 18 months to ramp up production to 500,000 bpd.

Following news of the agreement, Fitch Ratings noted that details of the condition of Iran's production infrastructure might well be sketchy, but with limited levels of investment, it is likely that only a portion of previous capacity can be brought back onstream without further material reinvestment. 

“We would expect to see some increases in production throughout the course of 2016 but that this would be much less than half of the full 1.4 million bpd that was lost,” said Alex Griffiths, Managing Director at the ratings agency.

“It will require significant investment and expertise - for which Iran is likely to want to partner with international oil companies. These projects typically take many months to agree, as oil companies and governments manoeuvre for the best terms, and often years to implement.”

Thirdly, it is also questionable whether Tehran actually wants to take the self-defeating step of ‘flooding’ the market even if it could. The 40 million or so barrels said to be held in storage by the country are likely to be released gradually to get the maximum value for Tehran’s holdings. Fourthly, the market is betting on an uptick in demand from Asia despite China's recent woes. The potential uptick wont send oil producers' pulses racing but would provide some pricing comfort to the upside.

Finally, IEA and others, while not forecasting a massive decline, are factoring in lower non-OPEC oil production over the fourth quarter of this year. Collectively, all of this is likely to provide support to the upside. The Oilholic’s forward projection is that Brent could flirt with $70 on the right side of Christmas, but the median for 2015 is now likely to come in somewhere between $60-$62.5. 

Yet many don’t agree, despite the oil price returning to largely where it was actually within the same session's trading itself on day of the Iran announcement. For instance, analysts at Bank of America Merrill Lynch still feel Iran could potentially raise production back up by 700,000 bpd over the next 12 months, adding downside pressure on forward oil prices of $5-$10 per barrel. 

On the other hand, analysts at Barclays don't quite view it that way and the Oilholic concurs. Like Fitch, the bank’s team neither see a huge short-term uptick in production volumes nor the oil price moving “markedly lower” from here as a result of the Iranian agreement.

“We believe that the market will begin to adjust, whether through higher demand, or lower non-OPEC supply in the next couple years but only once Iran’s contribution and timing are made clear. For now, OPEC is already producing well above the demand for its crude, and this makes it worse,” Barclays analysts wrote to their clients. 

“We do not expect the Saudis to do anything markedly different. Rather, they will take a wait and see approach.”

One thing is for sure, lower oil prices early on in the third quarter would have as detrimental an effect on the quarterly median, as early January prices did on the first quarter median (see above right, click to enlarge). End result is quite likely to ensure the year-end average would be in the lower $60s. That's all for the moment folks! Keep reading, keep it 'crude'!

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‘Crude’ sanctions on others always hurt Japan

The Oilholic finds himself in a rain-soaked Tokyo one final time before the big flying bus home! How Asian importing countries cope with sanctions on major oil & gas exporting jurisdictions is an interesting topic in this region reliant on foreign hydrocarbons for obvious reasons.

Mentioning Iran and of late curbs on Russia, deliberations over the past week with market commentators here in Tokyo, as well as Shanghai and Hong Kong, resulted in a consensus of opinion that Japan’s 30-odd oil & gas companies and regional gas-fired utilities feel the pain of such curbs more than corporate citizens of most other Asian importing nations.

The reason is simple enough; of the quartet of major Asian importers – namely China, Japan, India and South Korea – it’s the Japanese who are the most compliant when international pressures surface. Now, whether or not they can afford to is a different matter. According to the EIA and local publications, Japan consumed nearly 4.6 million barrels per day (bpd) in 2013, down from 4.7 million bpd in 2012. 

Going by the IEA’s latest projections, Japan is the third largest petroleum consumer in the world, behind the US and China. Yet domestic reserves are paltry in the region of 45.5 million barrels of oil equivalent, concentrated along the country’s western coastline. Inevitably, Japan imports most of its hydrocarbon requirements as a major industrialised nation.

Given the equation, if sanctions knock out or have the potential to knock out imports from one of its major partners, finding an alternative is neither easy nor simple. Forward planning also gets thrown right out of the window. We’ll discuss the recent Russian conundrum in a moment, but let’s examine the 2012 Iranian sanctions and the Japanese response to them first.

The country, almost immediately complied with requests to import less oil from Iran when European Union and US sanctions escalated in Q1 2012. At the time, Japan accounted for 17% of Iranian exports, above South Korea and India, but below China. The Japanese phased bid to reduce Iranian oil imports was lauded by the West, whereas China largely ignored the call, South Korea asked for more time and the Indians came up with ingenious ways to make remittances to Iran, until curbs on the insurance of tankers carrying Iranian crude began to bite.

Make no mistake, the sanctions on Iran hurt all four back in 2012, but Japan had to contend with the biggest refocusing exercise based on the level and speed of its compliance in moving away from Iranian crude. In the Oilholic’s opinion, for better or worse, that’s the price of being a G7 nation; and “having internationalism factored into the thinking,” adds a contact.

Fast forward to 2014, and the potential for securing of natural gas supplies from Russia to Japan seems to be taking a hit in wake of the Ukraine crisis. At the 21st World Petroleum Congress in June, when the tension had not escalated to the current level, prior to the downing of MH17, policymakers in on both sides were cooing over the potential for cooperation. 

The Institute of Energy Economics, Japan and the Energy Research Institute of the Russian Academy of Sciences even put out a joint white paper at the Congress contemplating a subsea gas pipeline route from Korsakov, Russia, to Kashima, Japan with an onshore Ishikari-Tomakomai section. It was claimed that technical feasibility of the ambitious project, capable of carrying a projected 8 bcm of natural gas to the Pacific Coast of Eastern Japan, had been positive.

Now it’s all gone a bit cold. One can’t directly attribute it to Russia’s face-off with the West, but currently both Japan and Russia describe the project as “just another idea”. This blogger can assure you, people were way more excited about it in June at the WPC than they are at the moment, and one wonders why?

Afterall, post-Fukushima with the rise of natural gas in Japan’s energy mix, however wild a project might be, carries weight rather than being relegated to just an idea. Contrast this with China, which has recently inked a long-term supply contract with the Russians. Quod erat demonstrandum!

With the evening drawing to a close, it’s time to digress a little and disclose the venue of this animated conversation – that’s none other than Tokyo’s iconic Hotel Okura. While a wee tipple is not cheap (average JPY1,700 for a swig of single malt), visiting this modernist institution is something special. 

When Tokyo first hosted the Olympic Games in 1964, the hotel was built in preparation to welcome the world. Since then, Hotel Okura has hosted every serving US President from Richard Nixon onwards.

Author Ian Fleming made James Bond fictitiously check-in to the hotel while in Tokyo in a chapter of "You only live twice". In recent work of fiction, the hotel also makes an appearance in Haruki Murakami’s 1Q84. It’s eclectic lobby, paneling, general sense of tranquility and overall panache of modern Japan is simply splendid (see above left). 

So here’s to 007, Murakami, Queen and Country and all the rest; but also it could be the Oilholic’s last drink at Hotel Okura as we know it. Alas, this grand place is about to fall prey to cultural philistinism in the name of progress as Tokyo prepares to host the Olympic Games once again in 2020. 

Last time around, for the 1964 games, Tokyo got the wretched Nihonbashi Expressway, a ‘clever’ project which included building an expressway over the Nihonbashi bridge, obscuring the magnificent view of Mount Fuji from the bridge and covering-up an ancient river flowering through the heart of Tokyo with steel and much more (see below left)!

Now atop a lot of flattening and rebuilding plans all over town, it seems Hotel Okura’s original main wing has been marked for demolition in August 2015, leaving only the South Tower operational. A proposed spending plan of US$980 million will see the wing open in the spring of 2019, reborn according to an employee as a “mixed-use tower” with 550 guest rooms and 18 stories of office space.

Life it seems will never be the same again for Hotel Okura and its many admirers including the Oilholic, who’d made it his mission not to leave Tokyo without visiting. Glad one got to see it before the demolition men get in. Well that’s all from the Far East folks as its time to bid a sad goodbye to the region!

Tokyo, Hong Kong, Macau and Shanghai, planes, trains, speedboats and automobiles – it was one heck of a crude ride that one will treasure forever. Next stop is London Heathrow, a reminder that all good things must end! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Tokyo Stock Exchange. Photo 2: Lobby of the Hotel Okura, Tokyo. Photo 3: The Oilholic at Hotel Okura’s Orchid Bar. Photo 4: Nihonbashi Expressway, Tokyo, Japan  © Gaurav Sharma, September, 2014.

OPEC's politics is the main show, not the quota

The Oilholic finds himself in a decidedly chilly Vienna ahead of the 164th meeting of OPEC ministers. This blogger's correspondence on all crude matters from the lovely capital of Austria goes back a good few years and to the old OPEC HQ.

However, in all these years of journeying here from London, there has been one constant - nearly every leading financial newspaper one could pick up at Heathrow Airport carried a report about expectations from the ministers' meeting ahead of the actual event taking place. Yet this morning, most either didn't flag up the meeting or had a perfunctory brief on it. The FT not only omitted a report, but with eerie symmetry had a special report on the future of NAFTA containing an article on shale transforming North American fortunes!

There is clear sense of anti-climax here as far as the decision on the production quota goes. Analysts think OPEC will hold its quota at 30 million barrels per day (bpd), traders think so too, as do "informed sources", "sources close to sources", "sources of sources", etc, etc. Making it even more official, Algerian oil minister Youcef Yousfi has quite candidly told more than one scribe here today that quota fiddling was unlikely.

So why are we all here? Why for the sideshow of course! Silly you, for thinking it was anything but! Only thing is, cometh the meeting tomorrow - it's going to be one hell of a sideshow. Weaved into it is the Oilholic's own agenda of probing the hypothesis of the incremental barrel a bit further.

For not only are additional barrels available globally owing to a decline in US imports courtesy shale, Iraq - which hasn't had an OPEC quota since 1998 - is seeing a massive uptick in production. Additionally Iran, apart from being miffed with Iraq for pumping so much of the crude stuff, could itself be welcomed back to market meaningfully over the coming months, adding its barrels to that 'crude' global pool.

While that is likely to take another six months at the very least - the Iraqis are pumping on regardless. You wouldn't expect anything else, but it has made Iran's new oil minister Bijan Zanganeh come up with the crude quote of the month (ok, last month) when he noted: “Iraq has replaced Iran's oil with its own. This is not friendly at all." Yup, tsk, tsk not nice and so it goes with the Saudis, who pumped in overdrive mode when the Iranians were first hit by sanctions in 2012.

To put things into context, without even going on a tangent about Shia-Sunni Muslim politics in the Middle East, Iraqi production has risen to 3 million bpd on the back of increasing inward investment. On the other hand, Iran has seen stunted investment following US and EU sanctions with production falling from 3.7 million bpd to 2.7 million bpd as the move hit it hard in 2012. Even if the Iranians go into overdrive, reliable sources suggest they'd be hard pressed to cap 3.5 million bpd over the next 12 months.

As for the Saudis, they have always been in a different league vying with Russia (and now the US) for the merit badge of being the world's largest producer of the crude stuff. Meanwhile, the price of Brent stays at three figures around US$111-plus - not a problem for the doves such as Saudi Arabia, but not high enough for the hawks such as Venezuela.

The Oilholic seriously doubts if political problems will be ironed out at this meeting. But what's crucial here is that it could mark a start. Can OPEC unite to effectively manage the issue of both its and the global pool's incremental barrels in wake of shale and all that? Appointing a new secretary general to replace Libya's Abdalla Salem el-Badri would be a start.

El-Badri is long due to step down but has carried on as the Iranians and Saudis have tussled over whose preferred candidate should be his successor. The quota decision is not the main talking point here, this OPEC sideshow most certainly is, especially for supply-side analysts and students of geopolitics. That's all from OPEC HQ for the moment folks, more from Vienna later! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2013. Photo: OPEC flag © Gaurav Sharma 2013.

Why Iran is miffed at (some in) OPEC?

The talking is over, the ministers have left the building and the OPEC quota ‘stays’ where it is. However, one OPEC member – Iran – left Vienna more miffed and more ponderous than ever. Why?

Well, if you subscribe to the school of thought that OPEC is a cartel, then it ought to come to the aid of a fellow member being clobbered from all directions by international sanctions over its nuclear ambitions. Sadly for Iran, OPEC no longer does, as the country has become a taboo subject in Vienna.

Even the Islamic Republic’s sympathisers such as Venezuela don’t offer overt vocal support in front of the world’s press. Compounding the Iranians’ sense of frustration about their crude exports being embargoed is a belief, not entirely without basis, that the Saudis have enthusiastically (or rather "gleefully" according to one delegate) stepped in to fill the void or perceived void in the global crude oil market.

Problems have been mounting for Iran and are quite obvious in some cases. For instance, India – a key importer – is currently demanding that Iran ship its crude oil itself. This is owing to the Indian government’s inability to secure insurance cover on tankers carrying Iranian crude. Since July, EU directives ban insurers in its 27 jurisdictions from providing cover for shipment of Iranian crude.

Under normal circumstances, Iranians could cede to the Indian demand. But these aren’t normal circumstances as the Iranian tanker fleet is being used as an oversized floating storage unit for the crude oil which has nowhere to go with the speed that it used to prior to the imposition of sanctions.

The Obama administration is due to decide this month on whether the USA will renew its 180-day sanction waiver for importers of Iranian oil. Most notable among these importers are China, India, Japan, South Korea, Taiwan and Turkey. US Senators Robert Menendez (Democrat) and Mark Kirk, have urged President Obama to insist that importers of Iranian crude reduce their purchase contracts by 18% or more to get the exemption.

So far, Japan has already secured an exemption while decisions on India, South Korea and China will be made before the end of the month. If the US wanted to see buyers cut their purchases progressively then there is clear evidence of this happening. Two sources of the Oilholic’s, in the shipping industry in Singapore and India, suggested last week that Iranian crude oil exports are down 20% on an annualised basis using November 23 as a cut off date. However, a December 6 Reuters' report by their Tokyo correspondent Osamu Tsukimori suggested that the annualised drop rate in Iranian crude exports was actually much higher at 25%.

Of the countries named above, Japan, South Korea and Taiwan have been the most aggressive in cutting Iranian imports. But the pleasant surprise (for some) is that India and China have responded too. Anecdotal evidence suggests that Chinese and Indian imports of Iranian crude were indeed dipping in line with US expectations.

When the Oilholic visited India earlier this year, the conjecture was that divorcing its oil industry from Iran’s would be tricky. Some of those yours truly met there then, now agree that Iranian imports are indeed down and what was stunting Iranian exports to India was not the American squeeze but rather the EU’s move on the marine insurance front.

If Iran was counting on wider support within OPEC, then the Islamic republic was kidding itself. That is because the Organisation is itself split. Apart from the Iraqis having their own agenda, the Saudis and Iranians never get along. This splits the 12 member block with most of Iran’s neighbours almost always siding with the Saudis. Iran’s most vocal supporter Venezuela, is currently grappling with what might (or might not) happen to President Hugo Chavez since he’s been diagnosed with cancer.

Others who support Iran keep a low profile for the fear of getting embroiled in diplomatic wrangling which does not concern them. So all Iran can do is moan about OPEC not taking ‘collective decisions’, hope that Chinese patronage continues even if in a diminished way and stir up disputes about things such as the appointment of the OPEC Secretary General.

The dependency of Asian importers on Iranian crude is not going to go overnight. However, they are learning to adapt in fits and starts as the last 6 months have demonstrated. This should worry Iran.

That’s all from Vienna folks! Since it’s time to say Auf Wiedersehen and check-in for the last British Airways flight out to London, the Oilholic leaves you with a view of his shadow on a sun soaked, snow-capped garden at Schönbrunn Palace. Christmas is fast approaching but even in the season of goodwill, OPEC won’t or for that matter can’t come to Iran’s aid while the US and EU embargo its exports. Even cartels, if you can currently call OPEC one, have limits. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Empty OPEC briefing room podium following the end of the 162nd meeting of ministers, Vienna, Austria. Photo 2: Schönbrunn Palace Christmas market © Gaurav Sharma 2012.

An OPEC seminar & an Indian minister

Indian oil minister S. Jaipal Reddy is rather sought after these days. You would be, if you represented one of the biggest consumers of the crude stuff. So it is just about right that OPEC’s 5th international seminar here in Vienna had Reddy speak at a session titled: “Oil and the World Economy.”

In face of growing international pressure to reduce its dependence on Iranian oil and running out of capital market mechanisms to actually pay for the stuff in wake of US/EU sanctions, the Indian minister certainly had a few things to say and wanted to be heard.

India is the world's fourth-largest oil importer with all of its major suppliers being OPEC member nations, viz. - Saudi Arabia, Iraq and Iran. Given what is afoot from a global macroeconomic standpoint, Reddy has called upon oil producing and consuming countries to work together to build trust and share market data to establish demand certainty in international oil markets.

Unsurprisingly, he admitted that in an oil-importing country like India, higher oil prices lead to domestic inflation, increased input costs, an increase in the budget deficit which invariably drives up interest rates and slows down the economic growth.

“There could not be a more direct cause and effect relation than high oil prices retarding economic growth of oil-importing countries,” Reddy said adding that a sustained US$10 per barrel increase in crude prices reduces growth in developing countries by 1.5%.

“We are meeting in difficult times. The Eurozone crisis, the continuing recession in the global economy, rising geopolitical tensions, a sustained phase of high and volatile international oil prices, extraneous factors continuing to influence the price formation of oil – all these pose serious challenges to the health of the global economy and stability of the world’s financial system. The current global financial crisis, which has lasted longer than we thought in 2008, is the greatest threat faced by the global economy since the Great Depression eight decades ago,” he said further.

Reddy revealed that between the Financial Year 2010-11 and 2011-12, India’s annual average cost of imported crude oil increased by US$27 per barrel, making India’s oil import bill rise from US$100 billion to a whopping US$140 billion.

“Furthermore, since we could not pass on the full impact of high international oil prices, we had to shell out subsidies to consumers amounting to US$25 billion dollars...India’s GDP grew at 6.9% during the last financial year down from the 8% plus growth rate experienced in the past few years,” he continued.

India and perhaps many others see themselves distinguishing two schools of thoughts here in Vienna. One school holds that the global economy has built up enough resilience to absorb oil price hikes due to (a) stronger demand from emerging economies and, (b) more enlightened Central Bank policies; the other school is categorical that high oil prices are one of the primary reasons for the weak conditions in the economies of the US and Europe.

“We subscribe to the latter view and hold that very high and volatile oil prices will continue to weaken global efforts for an expeditious recovery from the ongoing global economic recession and financial crisis,” Reddy concluded.

The viewpoint of an importers’ club member is always welcome at an exporting cartel’s event. For good measure, the representatives of Nigeria, Ecuador and Iran provided the exporters’ perspective and IFC’s spokesperson did the balancing act as a sideshow. As for the word “Iran” and the sanctions it faces; the Oilholic has been told in no uncertain terms by quite a few key people that it’s...er...ahem...a taboo subject at this meeting. That's all for the moment folks. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Indian Gas Station © Indian Oil Corporation Ltd.