Brent’s ‘nine-month high’, Aubrey, BP & more

Oh boy, what one round of positive data, especially from China, does to the oil market! The Brent forward month futures contract for March is within touching distance of a US$120 per barrel price and the bulls are out in force. Last Friday’s intraday price of US$119.17 was a nine-month high; a Brent price level last seen in May 2012. The cause – and you have heard this combination before – was healthy economic data from China, coupled with Syrian turmoil and an Iranian nuclear stalemate.

 

The Oilholic has said so before, and will say it again – the last two factors touted by market commentators have been broadly neutral in terms of their impact for the last six months. It is the relatively good macroeconomic news from China which is principally behind the rally that nearly saw the Brent price breach the US$120 level.

 

The bull-chatter is already in full force. In a note to clients, Goldman Sachs advised them last week to maintain a net long position in the S&P GSCI Brent Crude Total Return Index. The investment bank believes this rally is "less driven by supply shocks and instead by improving demand."

 

"Global oil demand has surprised to the upside in recent months, consistent with the pick-up in economic activity," the bank adds in an investment note. Really? This soon – on one set of data? One thing is for sure, with many Asian markets shut for the Chinese New Year, at least trading volumes will be lighter this week.

 

Nonetheless, the ‘nine-month high’ also crept into the headline inflation debate in the UK where the CPI rate has been flat at 2.7% since October, but commentators reckon the oil spike may nudge it higher. Additionally, the Brent-WTI spread is seen widening yet again towards the US$25 per barrel mark. On a related note, Enterprise Product Partners said that capacity on its Seaway pipeline to the US Gulf of Mexico coast from Cushing, Oklahoma will remain limited until much later this year.

 

Moving away from pricing, news arrived end-January that the inimitable Aubrey McClendon will soon vacate the office of the CEO of Chesapeake Energy. It followed intense scrutiny over the last nine months about revelations, which surfaced in May, regarding his borrowings to finance personal stakes in company wells.

 

As McClendon announced his departure on January 29, the company’s board reiterated that it had found no evidence to date of improper conduct by the CEO. McClendon will continue in his post until a successor is found which should be before April 1st – the day he is set to retire. The announcement marks a sad and unspectacular exit for the great pioneer who co-founded and led Chesapeake Energy from its 1989 inception in Oklahoma City and has been a colourful character in the oil and gas business ever since.

 

Whatever the circumstances of his exit may be, let us not forget that before the so called ‘shale gale’ was blowing, it was McClendon and his ilk who first put their faith in horizontal drilling and hydraulic fracturing. The rest, and US’ near self-sufficiency in gas supplies, is history.

Meanwhile, BP has been in the crude news for a number of reasons. First off, an additional US$34 billion in claims filed against BP by four US states earlier this month have provided yet another hurdle for the oil giant to overcome as it continues to address the aftermath of the 2010 Gulf of Mexico oil spill.

 

However, Fitch Ratings not believe that the new round of claims is a game changer. In fact the agency does not think that any final settlement is likely to be enough to interfere with BP's positive medium term credit trajectory. The latest claims come on top of the US$58 billion maximum liability calculated by Fitch. If realised, the cost of the spill could rise up to as much as US$92 billion.

 

The agency said the new claims should be put in the context of an asset sale programme that has raised US$38 billion. “This excludes an additional US$12 billion in cash to come from the sale of TNK-BP this year – upside in our analysis because we gave BP no benefit for the TNK-BP stake. BP had US$19 billion of cash on its balance sheet at 31 December 2012. That is after it has already paid US$38 billion in settlements or into escrow,” it added.

 

Away from the spill, the company announced that it had started production from new facilities at its Valhall field in the Norwegian sector of the North Sea on January 26 with an aim of producing up to 65,000 barrels of oil equivalent per day in the second half of 2013. Valhall's previous output averaged about 42,000 barrels per day (bpd), feeding crude into the Ekofisk oil stream.

 

Earlier this month, BP also said that both consortiums vying to link Azerbaijan's Shah Deniz gas field in the Caspian Sea, into Western European markets have an equal chance of success. BP operates the field which was developed in a consortium partnership with Statoil, Total, Azerbaijan’s Socar, LukAgip (an Eni, LUKoil joint venture) and others.

 

A decision, whether to pipe gas from the field into Austria via the proposed Nabucco (West) pipeline or into Italy through the rival Trans Adriatic Pipeline (TAP) project, is expected to be made by mid-2013. Speaking in Vienna, Al Cook, head of BP's Azeri operations, said, “I genuinely believe both pipelines at the moment have an equal chance. There's certainly no clear-cut answer at the moment.”

 

BP is aiming for the first gas from Shah Deniz II to be delivered to existing customer Turkey in 2018. Early 2019 is the more likely date for the first Azeri gas to reach Western Europe via this major development often touted as one which would reduce European dependence on Russia for its energy supplies.

 

The Shah Deniz consortium owns equity options in both the pipeline projects and Cook did not rule out that both Nabucco (West) and TAP could be built in the long term. Specifically, BP's own equity options, which are part of the Shah Deniz stakes, are pegged at 20% in TAP and 14% in Nabucco. Cook said BP was not “actively seeking” to increase its stake in either project – a wise choice indeed.

 

On February 4, BP said its Q4 2012 net profit, adjusted for non-operating items, currency and accounting effects, fell to US$3.98 billion from US$4.98 billion recorded over the corresponding quarter last year. Moving away from BP, Royal Dutch Shell posted a 6% dip in 2012 profits to US$27 billion on the back of weak oil and gas prices and lower exploration and production (E&P) margins.

 

The Anglo-Dutch oil major reported Q4 earnings of US$7.3 billion, a rise of 13%. However, on an adjusted current cost of supply basis and one-off asset sales, the profit came in at US$5.58 billion. In particular, Shell’s E&P business saw profits dip 14% to US$4.4 billion, notwithstanding an actual 3% increase in oil and gas production levels. However, the company did record stronger refining margins.

 

Ironically, while acknowledging stronger refining margins, Shell confirmed its decision to close most of its Harburg refinery units in Hamburg, Germany. The permanent shutdown of much of its 100,000 bpd refinery is expected next month in line with completing a deal made with Swedish refiner Nynas in 2011.

 

Finally, in a typical Italian muddle, several oil executives in the country are under investigation following a probe into alleged bribery offences related to the awarding of oil services contracts to Saipem in Algeria. Eni has a 43% stake in Saipem which is Europe’s biggest oil services provider. While the company itself denied wrongdoing, the probe was widened last Friday to include Eni CEO Paolo Scaroni.

 

The CEO’s home and office were searched as part of the probe. However, Eni is standing by their man and said it will cooperate fully with the prosecutor’s office in Milan. So far, Pietro Franco Tali (the CEO of Saipem) and Eni’s Chief Financial Officer Alessandro Bernini (who was Saipem’s CFO until 2008) have been the most high profile executives to step down in wake of the probe. Watch this crude space! That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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© Gaurav Sharma 2013. Photo 1: Asian oil rig © Cairn Energy. Photo 2: Gas extraction site © Chesapeake Energy.

Crude markets & the Eurozone mess

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

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

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

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

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

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

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

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

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

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

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

Col Gaddafi, crude euphoria & last 7 days

The moment Libyan rebels or the National Transitional Council (NTC) as the media loosely describes them, were seen getting a sniff around the Libyan capital Tripoli and Col. Gaddafi’s last bastion, some crude commentators went into euphoric overdrive. Not only did they commit the cardinal sin of discarding cautious optimism, they also belied the fact that they don’t know the Colonel and his cahoots at all. Well, neither does the Oilholic for that matter – at least not personally. However, history tells us that this belligerent, rambling dictator neither has nor will give up that easily. In fact at the moment, everyone is guessing where he is?

To begin, while the end is nigh for the Gaddafi regime, a return to normalcy of oil production outflows will take months if not years as strategic energy infrastructure was damaged, changed hands several times or in some cases both. As a consequence production, which has fallen from 1.5 million barrels per day (bpd) in February to just under 60,000 bpd according to OPEC, cannot be pumped-up with the flick of a switch or some sort of an industrial adrenaline shot.

In a note to clients, analysts at Goldman Sachs maintain their forecast that Libya's oil production will average 250,000 bpd over 2012 if hostilities end as "it will be challenging to bring the shut-in production back online."

These sentiments are being echoed in Italy according to the Oilholic's, a country whose refineries stand to gain the most in the EU if (and when) Libyan production returns to pre-conflict levels. All Italy’s foreign ministry has said so far is that it expects contracts held by Italian companies in Libya to be respected by “whoever” takes over from Gaddafi.

Now, compound this with the fact that a post-Gaddafi Libya is uncharted geopolitical territory and you are likely to get a short term muddle and a medium term riddle. Saudi (sour) crude has indirectly helped offset the Libyan (sweet) shortfall. The Saudis are likely to respond to an uptick in Libyan production when we arrive at that juncture. As such the risk premium in a Libyan context is to the upside for at least another six months, unless there is more clarity and an abrupt end to hostilities.

Moving away from Libya, in a key deal announced last week, Russia’s Lukoil and USA’s Baker Hughes inked a contract on Aug 16th for joint works on 23 new wells at Iraq's promising West Qurna Phase 2 oil field. In a statement, Lukoil noted that drilling will begin in the fourth quarter of this year and that the projected scope of work will be completed “within two years.”

While tech-specs jargon regarding the five rigs Baker Hughes will use to drill the wells at a depth exceeding 4,000 meters was made available, the statement was conspicuously low on the cost of the contract. The key objective is to bring the production in the range of 145,000 to 150,000 bpd by 2013.

Switching tack to commodity ETFs, according to early data for August (until 11th) compiled by Bloomberg and as reported by SGCIB, energy ETPs have attracted their first net inflows in five months with US$9.5 billion under management. This represents a net inflow of US$0.7 billion in August versus an outflow of US$1.5 billion recorded in January. Interest in precious metals continues, even after a very strong July, but base metal ETPs have returned to net outflows. (See adjoining table, click to enlarge)

Meanwhile, Moody’s has raised the Baseline Credit Assessment (BCA) of Russian state behemoth Gazprom to 10 (on a scale of 1 to 21 and equivalent to its Baa3 rating) from 11. Concurrently, the ratings agency affirmed the company's issuer rating at Baa1 with a stable outlook on Aug 17th. The rating announcement does not affect Gazprom's assigned senior unsecured issuer and debt ratings given the already assumed high level of support it receives from the Kremlin.

Moody's de facto regards Gazprom as a government-related issuer (GRI). Thus, the company's ratings incorporate uplift from its BCA of 10 and take into account the agency's assessment of a high level of implied state support and dependence. In fact raising Gazprom's BCA primarily reflects the company's strengthened fundamental credit profile as well as proven resilience to the challenging global economic environment and negative developments on the European gas market in 2009-10.

"Gazprom has a consistent track record of strong operational and financial performance, which was particularly tested in 2009 - a year characterised by lower demand for gas globally and domestically, as well as a generally less favourable pricing environment for hydrocarbons," says Victoria Maisuradze, Senior Credit Officer and lead analyst for Gazprom at Moody's.

Rounding-off closer to home, UK Customs – the HMRC – raided a farm on Aug 17th in Banbridge, County Down in Northern Ireland, where some idiots had set-up a laundering plant with the capacity to produce more than two million litres of illicit diesel per year and evade around £1.5 million in excise duty. Nearly 6,000 litres of fuel was seized and arrests made; but with distillate prices where they are no wonder some take risks both with their lives, that of others and the environment. And finally, Brent and WTI are maintaining US$100 and US$80 plus levels respectively for the last seven days.

© Gaurav Sharma 2011. Photo: Veneco Oil Pumps © National Geographic. Table: Global commodities ETPs © Société Générale CIB/Bloomberg Aug 2011.