The year that was & ‘crude’ predictions for 2014

As crude year 2013 came to a close, the Oilholic found himself in Rotterdam gazing at the Cascade sculpture made by Atelier Van Lieshout, a multidisciplinary contemporary arts and design company.

This eight metre high sculpture, in a city that was once the world's busiest port [before Shanghai overtook it in 2004], comprises of 18 stacked oil drums, which give an appearance of having descended from the sky. They combine to form a monumental column from which the life-size drums drip a viscous mass acquiring the shapes of human figures [see left, click to enlarge].

Perhaps these figures and barrels symbolise us and our sticky relationship with the crude oil markets. For all the huffing and puffing, bears and bulls, predictions and forecasts, dips influenced by macroeconomics and spikes triggered by geopolitics – the year-end Brent crude oil price level came in near where it was at the end of 2012; in fact it was 0.3% lower! On the other hand, the WTI reversed its 7 percent annualised reversal recorded at the end of 2012, to finish round about 8 percent higher in year-over-year terms on the last day of trading in 2013.

Was there an exact science in the good and bad predictions about price levels we saw last year – nope! Does the Oilholic feel both benchmark prices are running contrary to supply-side dynamics given the current macroeconomic backdrop – yup! Did paper barrels stuff the actual merchants waiting at the end of  pipelines to collect their crude cargo – you bet!

Watching Bloomberg TV on January 2 brought home the news that money managers raised their net-long positions for WTI by 4.4 percent in the week ended December 24; the fourth consecutive increase and longest streak since July, according to the broadcaster. This side of the pond, money managers followed their friends on the other side and raised net bullish bets on Brent crude to the highest level in 10 weeks, according to ICE Futures Europe.

Speculative bets that prices will rise [in futures and options combined], outnumbered short positions by 136,611 lots in the week ended December 31, according to ICE's weekly Commitments of Traders report. The addition of 7,670 contracts, or 6 percent, brought the net-long positions to the highest level since October 22. It seems for some, the only way is up, because the fine line between pragmatic trading and gambling has long gone in actual fact.

The Oilholic predicted a Brent price in the range of US$105 to $115 in January last year. As Brent came in flat at year-end, yours truly was on the money. The heart said then, as it does now, even that range – despite being proved correct – was in fact overtly bullish but workable in this barmy paper barrel driven market.

For 2014, hoping that some of the supply-side positivity would be factored in to the mindset of traders, the Oilholic's prediction is for a Brent price in the range of $90 to $105 and WTI price range of $85 to $105. Brent's premium to the WTI should in all likelihood come down and average around $5 barrel.

The Oilholic's opinion is in sync with some, but also quite contrary to many of the bullish City forecasts. That's for them to maintain – this blogger is quietly confident that more Iraqi and Iranian crude will come on the market at some point over 2014. The US isn't importing as much and incremental barrels will henceforth come on to the markets. These will hopefully trigger a much needed price correction.

Of all the price prediction notes in this blogger's Inbox over the first week of 2014, one put out by Steven Wood and Terry Marshall of Moody's appears to be the most pragmatic. Their price assumptions, used for "ratings purposes only rather than as predictions", are for Brent to average $95 per barrel in 2014 and $90 in 2015, compared to $90 per barrel in 2014 and $85 in 2015 for WTI. As both analysts noted: "Oversupply will cool oil prices in 2014."

"A drop in Chinese growth and a surge in OPEC production pose the biggest risks to oil prices as we head into the New Year. Prices could fall if Chinese GDP growth slows significantly and OPEC members go above targeted production of 30 million barrels per day (bpd)," they added.

Away from crude price predictions on a standalone basis and reflecting on the year that was, the US EIA said prices of energy commodities decreased only modestly or increased last year, while prices of non-energy commodities like wheat and copper generally fell significantly.

Natural gas, western coal, electricity and WTI crude prices increased, while Brent, petroleum products and eastern coal prices decreased slightly. "In total, the divergence between price trends for energy and non-energy commodities grew after the summer of 2013. This is in contrast to 2012 when metals prices were stable or experienced slight increases, and a severe drought drove prices of some agricultural commodities higher in the second half of the year," it added.

From the EIA to OPEC where both its meetings in lovely Vienna last year, duly attended by the Oilholic, turned out to be predictable affairs with the "official" quota still at 30 million bpd. And we still don't have a long overdue successor to Secretary General Abdalla Salem El-Badri. The Oilholic also managed to grab a moment with Saudi oil minister Ali Al-Naimi at a media scrum in May. Away from the meetings, the year actually began in terrible fashion for OPEC following a terror attack on an Algerian facility, but easing of tensions with Iran towards the end of the year, was a positive development.

It was also the year in which the Brits not only got excited about their own shale exploration prospects, but also inked their first contract to import proceeds of the US shale bonanza via Sabine Pass. Analysts liked it, Brits cheered it, but US politicians and energy intensive industries stateside didn't. The Keystone XL pipeline project, stuck in the quagmire of US politics, also dragged on.

That yours truly moaned about the banality of market forecasts based on short-termism more than once was not unexpected; a blog on the bankrolling of Thatcherism by the oil and gas sector after the Iron Lady's death in May certainly was.

Apart from routine visits to OPEC, ever the intrepid traveller, this blogger blogged from lands far away and some not so far away. The year began with a memorable visit to the Chicago Board of Trade at the kind invitation of Phil Flynn of Price Futures; a friend and analyst who never sits on the fence in any debate and is most likely to be vindicated as the Brent-WTI spread narrows over 2014.

This was followed by a hop across The Lakes to Toronto to gauge opinion on Keystone XL. Jaunts to the G8 2013 Summit in Northern Ireland, crude ol' Norway, Abu Dhabi and a first visit to Muscat and Khasab to profile Oman's oil and gas sector followed thereafter.

Before calling time on 2013 in Rotterdam, the Oilholic headed out to the Oil Capitals of Europe and North America – chasing the uptick in oilfield services sector activity in Aberdeen, and Platts' response to the Houston Glut in the shape of its new Light Houston Sweet (LHS) benchmark. Moving away from travels, yours truly also reviewed another seven books for your consideration.

For all intents and purposes, it's been a crude old year! And it wouldn't have been half as spiffing without the support and feedback of you all - the dear readers of this humble blog. For those of you, who wanted this blogger on Twitter; you are welcome to follow @The_Oilholic

There goes the look back at Crude Year 2013. As the Oilholic Synonymous Report embarks upon its fifth year on the Worldwide Web and the seventh year of its virtual existence – here's to 2014! 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 2014. Photo: Cascade sculpture by Atelier Van Lieshout Company, Rotterdam, The Netherlands © Gaurav Sharma, January 1, 2014.

A chat at Platts, ‘LHS’ & the Houston glut

The 'Houston glut debate' gained further traction this summer as the metropolitan area has been a recipient of rising inland crude oil supplies heading towards the US Gulf Coast. New light and heavy grades of crude are showing up – principally from the Eagle Ford, Permian Basin, North Dakota and Western Canada.

The ongoing American oil production boom complements existing Texas-wide E&P activity which is getting ever more efficient courtesy horizontal drilling. Yet, infrastructural impediments stunt the dispatch of crude eastwards from Texas to the refineries in Louisiana.

In fact, many analysts in Chicago and New York have long complained that Houston lacks a benchmark given it has the crude stuff in excess. It seems experts at global energy and petrochemical information provider Platts thought exactly the same.

Their response was the launch of the Platts Light Houston Sweet (or should we say ‘LHS’) in July. Nearly four months on, the Oilholic sat down with Platts Associate Editorial Director Sharmilpal Kaur to get her thoughts on the benchmark and more. So first off, why here and why now?

"We launched the new crude assessment this year as we felt it was finally time for a benchmark that reflected the local dynamic. I’d also say the US was ripe for a fresh benchmark and we went for one based on the price of physical crude oil basically FOB out of three major terminals in Houston."

These include Magellan East Houston Terminal, Enterprise Houston Crude Oil (ECHO) Terminal, and the Oil Tanking Houston Terminal – the location markers for the assessment. Kaur says as the Houston crude transportation infrastructure develops, Platts may consider additional terminals for inclusion in its LHS assessment basis.

Specifically, completion of the Kinder Morgan/Mercuria 210,000 barrels per day (bpd) rail terminal on the Houston Ship Channel could potentially provide another avenue for both WTI Midland and Domestic Sweet quality crudes to enter the Houston market.

The chances of Platts making a fist of LHS are good according to anecdotal evidence, especially as half of the supply side analyst community has been calling for such an assessment. The minimum volume considered by the information provider is 25,000 barrels, or 1,000 bpd rateable, in line with other US domestic pipeline grades.

Platts publishes LHS as a flat price; which is assessed using both fixed as well as floating price information. In the case of floating prices against WTI, Platts generally calculates the fixed price assessment using calendar month average (CMA) WTI or front-month WTI as the floating basis, depending on the WTI basis reported in bids, offers, and transactions.

In the case of light sweet price information reported against the Louisiana Light Sweet (LLS), Platts calculates the fixed price using LLS trade month. In the case of ICE Brent light sweet crude market, Platts calculates the resulting fixed price using an ICE Brent strip that reflects the value of ICE Brent for the relevant pipeline month. Additionally, in the absence of spot activity for light sweet crude in Houston, Platts will look at related markets such as WTI at Midland or WTI at Cushing and adjust its daily LHS assessment accordingly.

That absence won’t be all that frequent as the Houston crude oil distribution system looks set to receive new supplies of over 1.7 million bpd in terms of pipeline capacity delivering into the region by the end of June 2014.

A regional trading market for producers and dispatchers selling the crude stuff to Gulf Coast refiners is well past infancy. Kaur reckons Houston’s spot trading market could rival those at Cushing, Oklahoma and St. James, Louisiana. (See Platts map illustrating the area’s crude oil storage and distribution projections on the right, click to enlarge).

 

So far so good, but in the ancillary infrastructure development and supply sources to Texas, does Kaur include Keystone XL at some point in the future?

"Yes, the pipeline extension will be built and despite the uptick in US crude oil production remains as relevant as ever. There are facets of Keystone XL which are hotly contested by those for and against the project – from its job creation potential to environmental concerns. My take is that Keystone XL would offer is incremental supply of heavy crude out of Canada that comes all the way down to the Gulf Coast and then gets blended."

"What’s produced domestically in the US (say in the Eagle Ford and Bakken) is light crude. What Gulf Coast refiners actually like are heavier crudes blended to form a middle blend. Canadian crude has started pushing out the Latin American crudes and the reason for that is pure pricing as Canadian crude is cheaper than Latin American crude. That trend is basically continuing…it’s why the pipeline extension was planned, and why every refiner in Houston will tell you its needed. President Barack Obama will get there once the legacy component of Keystone XL has been worked out."

As for the hypothesis that Canada may look elsewhere should the project not materialise, Kaur doesn’t quite see it that way. Simple reason is that the Americans know the Canadians and vice versa with very healthy trading relations between the two neighbours for better parts of a century.

"China as an export market is an option for Canada. It’s being explored vigorously by Canadian policymakers – but I see two impediments. Pulling a pipeline from Alberta to British Columbia in order to access the Chinese market via the West Coast won’t be easy. It will, as Keystone XL will, eventually get built, but not overnight. Secondly, the Chinese have diversified their importation sources more than any other country in the world – OPEC, Latin America, West Africa and Russia, to name a few."

Furthermore, US crude imports from West Africa are on the decline. That cargo has to go somewhere and industry evidence suggests its going to China, followed by Japan and to a much lesser extent India.

 

"The Indians would like to get their hands on Canadian crude too – no doubt about that; but logistics and cost of shipping complicates matters. A simple look at the world map would tell you that. Don’t get me wrong; China needs Canadian exports, but given the global supply dynamic Canada probably needs China more as a major export market."

In sync with what the ratings agencies are saying, Kaur sees also E&P capex going up over the next two to three years. "Most IOCs and NOCs see it that way. If you drove through exploration zones in the Bakken Shale, you’d be a busy man counting all the logos of oil & gas firms dotting the landscape, ditto for the Canadian oil sands where foreign direct investment is clearly visible."

Sharmilpal Kaur, Associate Editorial Director, Platts

The Platts expert flags up a fresh example – that of Hess Corporation which recently sold its US trading operations to Centrica-owned Direct Energy.

"Here is a company indicating quite clearly that it’s selling up the trading book and using that money to invest in Bakken wells as well as globally. Right now, in terms of E&P – the market is so lucrative, with an oil price level to sustain it, that people are making sure they find the capex for it and in many cases preferably from their balance sheets." The integrated model is not dead yet, but IOCs holding refineries on their balance sheet have clearly indicated that their priorities are elsewhere.

"You see ageing refineries in trouble within the OECD; at least 15 have faced problems in Europe owing to overcapacity. Yet China, India and Middle East continue to build new refineries – often out of need."

"China has indicated that it wants to be a regional exporter of refined products at some point. That’s a trading model it wants to adopt because it now has access to multiple crude oil supply sources. As a follow-up to its equity stakes in crude production sites, China now has ambitions and wherewithal of becoming a global refining power. In the Chinese government’s case – its need and ambition combined!"

The Oilholic and Kaur agreed that the chances of US crude oil ending up in the hands of foreign refiners, let alone Chinese ones, were slim to none for the moment. In the fullness of time, the US may actually realise it is in its own interest to export crude. Yet, given the politics it is still a question of 'if' and not an imminent 'when'. 

Hypothetically, should the US employ free market principals and export its light crude which is surplus to its requirements, but get heavier crude in return more in sync with its refining prowess – the exchange would work wonders.

"It could command a better price for its light crude and actually buy the heavier crude cheaper. My thinking is that the US would actually come out on top and the rest of the world would benefit too. Here we have too much light crude, the rest of the world craves it – so there’s the opportunity in theory. In the unlikely event that this was to happen, we would see a very different supply dynamic. Price spikes associated with disruptions - for example as we saw during the Libyan conflict in 2011 - would be mitigated," says Kaur

Nonetheless, even with a ban on crude oil exports, the US oil & gas bonanza has weakened OPEC. There are two ways of approaching this – concept of incremental barrels on a virtual supply ledger and the constantly declining level of US imports.

"As US imports decline, barrels originally heading to these shores will be diverted elsewhere. That’s where the US has a voice when it speaks to OPEC. Supply side analysts such as you are tallying US, Russia and [OPEC heavyweight] Saudi Arabia’s production level. Now add Canada, prospects of a Mexican and Iraqi revival, a gradual Libyan uptick and some semblance of a resolution to the Iranian standoff – then there’s a lot of it around and OPEC understands it."

While Platts does not comment on the direction of the oil price, what Kaur sums up above is precisely why the Oilholic has constantly quipped over the course of 2013 that a three-figure Brent price is barmy and unreflective of supply side scenarios in an uncertain macroeconomic climate. Blame the blithering paper barrels!

"At least, you can take comfort from the fact that the peak oil theorists have temporarily disappeared. I haven’t seen one in Houston for while," Kaur laughs. In fact, the Oilholic hasn’t either – in Houston and beyond. That’s all for the moment from Platts' Houston hub! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: Oil pipeline, Fairfax, Virginia, USA © O. Louis Mazzatenta / National Geographic. Photo 2: Sharmilpal Kaur, Associate Editorial Director at Platts © Gaurav Sharma. Graphic: Map of Houston crude oil storage and distribution © Platts