IEA on demand, Lavrov on Iran plus crude chatter

In its latest monthly report, the IEA confirmed what the Oilholic has been blogging for the past few months on the basis of City feedback – that the likelihood of another global recession will inhibit demand for crude oil this year, a prevalent high oil price might in itself hit demand too and seasonally mild weather already is.

While geopolitical factors such as the Iranian tension and Nigerian strikes have supported bullish trends of late, the IEA notes that Q4 of 2011 saw consumption decline on an annualised basis when compared with the corresponding quarter of 2010. As a consequence, the agency feels inclined to reduce its 2012 demand growth forecast by 220,000 barrels per day (bpd) from its last monthly report to 1.1 million barrels.

"Two inherently destabilising factors are interacting to give an impression of price stability that is more apparent than real. The first is a rising likelihood of sharp economic slowdown, if not outright recession, in 2012. The second factor, which is counteracting bearish pressures, is the physical market tightening evident since mid-2009 and notably since mid-2010," it says in the report.

The IEA also suggests that a one-third downward revision to GDP growth would see this year's oil consumption unchanged at 2011 levels. On the Iranian situation and its threat to disrupt flows in the Strait of Hormuz, through which 20% of global oil output passes, the agency notes, “At least a portion of Iran's 2.5 million bpd crude exports will likely be denied to OECD refiners during second half 2012, although more apocalyptic scenarios for sustained disruption to Strait of Hormuz transits look less likely.”

Meanwhile, Russian foreign minister Sergei Lavrov has weighed in to the Iran debate with his own “chaos theory”. According to the BBC, the minister has warned that a Western military strike against Iran would be "a catastrophe" which would lead to "large flows" of refugees from Iran and would "fan the flames" of sectarian tension in the Middle East. Israeli Defence Minister Ehud Barak earlier said any decision on an Israeli attack on Iran was "very far off".

Meanwhile, one of those companies facing troubles of its own when it comes to procuring light sweet crude for European refiners is Italy’s Eni which saw its long term corporate credit rating lowered by S&P from 'A' from 'A+'. In addition, S&P removed the ratings from CreditWatch, where they were placed with negative implications on December 8, 2011.

Eni’s outlook is negative according to S&P and the downgrade reflects the ratings agency’s view that the Italian oil major’s business risk profile and domestic assets have been impaired by the material exposure of many of its end markets and business units to the deteriorating Italian operating environment. Eni reported consolidated net debt of €28.3 billion as of September 30, 2011. Previously, Moody’s has also reacted to the Italian economy versus Eni situation over Q4 2011.

Elsewhere conflicting reports have emerged about the Obama administration’s decision to deny a permit to Keystone XL project something which the Oilholic has maintained would be a silly move for US interests as Canadians can and will look elsewhere. Some reports said the President has decided to deny a permit to the project while others said a decision was unlikely before late-February. This article from The Montreal Gazette just about sums up Wednesday's conflicting reports.

When the formal rejection by the US state department finally arrived, the President said he had been given insufficient time to review the plans by his Republican opponents. At the end of 2011, Republicans forced a final decision on the plan within 60 days during a legislative standoff.

The Republican Speaker of the US House of Representatives, John Boehner, criticised the Obama administration for its failure over a project that would have created "hundreds of thousands of jobs" while the President responded by starting an online petition so that the general population can express its opposition to the Keystone XL pipeline.

The merits and demerits of the proposal aisde, this whole protracted episode represents the idiocy of American politics. Canadians should now seriously examine alternative export markets; something which they have already hinted at. The Oilholic's timber trade analogy always makes Canadians smile. (Sadly, even Texans agree, though its no laughing matter).

On the crude pricing front, the short term geopolitically influenced bullishness continues to provide resistance to the WTI at the US$100 per barrel level and Brent at US$111. Sucden Financial's Myrto Sokou expects some further consolidation in the oil markets due to the absence of major indicators and mixed signals from the global equity markets, while currency movements might provide some short-term direction. “Investors should remain cautious ahead of any possible news coming out from the Greek debt talks,” Sokou warns.

Finally, global law firm Baker & McKenzie is continuing with its Global Energy Webinar Series 2011-2012 with the latest round – on International Competition Law – to follow on January 25-26 which would be well worth listening in to. Antitrust Rules for Joint Ventures, Strategic Alliances and Other Modes of Cooperation with Competitors would also be under discussion. Thats all for the moment folks. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Oil Refinery, Quebec, Canada © Michael Melford / National Geographic.

OPEC 'maintains' production at 30 million bpd

In line with market expectations and persistent rumours heard here all morning in Vienna, OPEC has agreed to officially maintain its crude production quota at 30 million barrels per day (bpd) at its 160th meeting, thereby legitimising the increase the Saudis triggered after the acrimony of the last meeting in June.

The OPEC Secretary General Abdalla Salem El-Badri said the heightened price volatility witnessed during the course of 2011 is predominantly a reflection of increased levels of speculation in the commodities markets, exacerbated by geopolitical tensions, rather than a result of supply/demand fundamentals.

Ministers also expressed concern regarding the downside risks facing the global economy including the Euro-zone crisis, persistently high unemployment in the advanced economies, inflation risk in emerging markets and planned austerity measures in OECD economies.

“All these factors are likely to contribute to lower economic growth in the coming year. Although world oil demand is forecast to increase slightly during the year 2012, this rise is expected to be partially offset by a projected increase in non-OPEC supply,” El-Badri noted.

Hence, OPEC decided to maintain the production level of 30 million bpd curiously “including production from Libya, now and in the future”. The quota would be reviewed in six months and does not include Iraqi supply. The cartel also agreed that its members would, if necessary, take steps including voluntary downward adjustments of output to ensure market balance and reasonable price levels.

The last bit stirred up the scribes especially as El-Badri, himself a Libyan, noted that his country’s production will be back to 1 million bpd “soon” followed by 1.3 million bpd end-Q1 2012, and 1.6 million at end of Q2 2010; the last figure being the pre-war level.

Despite persistent questioning, the Secretary General insisted that Libyan production will be accommodated and 30 million bpd is what all members would be asked to adhere to formally. He added that the individual quotas would be reset when Libyan production is back to pre-war levels.

El-Badri also described the "meeting as amicable, successful and fruitful" and that OPEC was not in the business of defending any sort of crude price. “We always have and will leave it to market mechanisms,” he concluded.

Iran's Rostem Ghasemi said the current OPEC ceiling was suitable for consumers and producers. “We and the Saudis spoke in one voice.” He also said his country was "cool" on possible oil export embargoes but neither had any news nor any inclination of embargoes being imposed against his country yet. OPEC next meets in Vienna on June 14th, 2012.

Following OPEC’s move, the Oilholic turned the floor over to some friends in the analyst community. Jason Schenker, President and Chief Economist of Prestige Economics and a veteran at these events, believes OPEC is addressing a key question of concern to its members with the stated ceiling.

“That question is how to address the deceleration of global growth and pit that against rising supply. And what OPEC is doing is - not only leaving the production quota essentially unchanged but also holding it at that unchanged level,” Schenker said.

“When the Libyan production does indeed come onstream meaningfully or to pre-war levels between now and Q2 or Q3 of 2012, smart money would be on an offsetting taking place via a possible cut from Saudi Arabia,” he concluded.

Myrto Sokou, analyst at Sucden Financial Research, noted that an increase (or rather the acknowledgement of an increase) in the OPEC production limit after three years might add further downward pressure to the crude price for the short-term with a potential for some correction lower in crude oil prices.

“On top of this, the uncertain situation in the Eurozone continues to dominate the markets, weighting heavily on most equity and commodity prices and limiting risk appetite,” he said. And on that note, it is goodbye from the OPEC HQ. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2011. Photo: OPEC's 160th meeting concludes in Vienna, Austria - seated (R to L) OPEC Secretary General Abdalla Salem El-Badri and President Rostem Ghasemi © Gaurav Sharma 2011.

Greece isn’t hitting crude on a standalone basis

Now how many times have we been here in recent times when yet another week begins with market chatter about Eurozone contagion and Greece weighing on the price of Black Gold? Quite frankly it is now getting excruciatingly painful – the chatter that is! The linkage between the abysmal state of affairs in Greece and lower crude prices is neither simple nor linear and a tad overblown from a global standpoint.

Bearish trends are being noted owing to an accumulation of macro factors. Worries about state of the US economy, should lead and actually led the bearish way not Greece. Nonetheless, since Greece’s economic woes have become the poster children of wider problems in the Eurozone for a while now, concerns about its economy never fail to dampen intraday trade on a Monday.

Sucden Financial Research’s Myrto Sokou notes that crude oil prices have started the week on a negative side, as weaker global equity markets and persistent concerns about Greek debt crisis weighed heavily on market sentiment and prompted investors to lock in recent profits. WTI crude oil slid lower 1% toward US$87 per barrel, while Brent oil contract retreated to retest the US$111 per barrel area.

Simply put, European leaders’ decision to delay the Greek tranche payment and EFSF expansion decisions until October, has hit futures trading this side of the Atlantic. Additionally, in the absence of major economic indicators this week, Sokou notes that investors will now be watching for currency movements that could give some direction to the energy market. In any case, investors are being cautious ahead of the two-day US FOMC meeting which concludes on Wednesday.

This week comes on the back of Société Générale’s research published last week which suggested a meaningful slide in oil prices should begin in the next 30-45 days. It is worth rewinding to last Christmas when a stunted recovery was taking hold and people were forecasting oil prices in the circa of US$120 per barrel for 2012. Here’s an example of a JP Morgan research note to clients from December 2010. This not to say that a US$120 price is not achievable – but the last six weeks of ‘over’ listening (or not) to the Greeks’ problems, economic stagnation in the US and even declining consumption forecasts for Asian markets has seen most analysts revise their 2012 forecasts down by almost US$10 per barrel on average.

OPEC Secretary General Abdalla Salem el-Badri certainly thinks there isn’t one economic woe without the other – not just Greece! Speaking at a forum, el-Badri noted that global demand for oil was seen rising at a level which was below expectations. He attributed this to fiscal woes in Europe (sigh!), high unemployment in the US and possible Chinese government action to prevent overheating of their economy.

El-Badri, a Libyan himself, also expressed hope that Libyan production would rise by 500,000 to 600,000 barrels per day (bpd) sometime in the near future. Club all bearish sentiments together, and even the OPEC secretary general is surprised that there has not been an even greater price correction in the crude markets.

Moving away from pricing, two noteworthy corporate stories these past few days have come from the US and Falkland Islands. On September 12, French engineering firm Technip announced its intention to acquire 100% of shares of US-based subsea company Global Industries Ltd. for a total transaction value of US$1.073 billion in cash, including approximately US$136 million of net debt.

The deal is slated for completion over Q1 2012. Elsewhere, British company Rockhopper Exploration, which is searching for crude stuff off the coast of Falkland Islands said on September 15 that it has made further significant finds.

It now expects to start pumping oil by 2016 and would need US$2.1 billion to develop its Sea Lion prospect. Company estimates are for 350 million barrels of recoverable reserves and production peak of 120,000 bpd is expected in 2018. Given the figure, smart money is on Rockhopper either partnering with another company or being taken over by a major. While Rockhopper continues to surprise, that the Argentines are moaning is hardly a surprise.

The Falkland Islands have always be a bone of contention between Argentina and UK who went to war over the Islands in 1982 after the former invaded. UK forces wrested back control of the islands, held by it since 1833, after a week long war that killed 649 Argentine and 255 British service personnel according to UK archives.

The prospect of oil in the region has renewed diplomatic spats with the Argentines complaining to the UN and launching fresh claims of sovereignty. Since, most Falkland islanders want to retain British sovereignty – UK PM David Cameron has declared the issue “non-negotiable”, while Argentina has declared him “arrogant”. It is at present, as the Oilholic noted last year, nothing more than a bit of diplomatic argy-bargy with an oily dimension and is highly likely to stay there.

Finally, concluding on a much lighter note, the London Stock Exchange (LSE), a preferred destination for oilholics, energy majors and miners for their listings, has quite literally become a hive of activity. One is reliably informed via its press office that the LSE has introduced 60,000 bees to their new home in hives situated on the roof of its City HQ at Paternoster Square (see photo on the left).

The introduction of the busy bees is aimed at encouraging growth of the urban bee population in the UK. The initiative is in a partnership with award-winning UK social enterprise - The Golden Company - which works with young people to develop viable businesses that produce, market and sell honey and honey-based natural cosmetics.

Xavier Rolet, CEO of LSE Group describes the move as the perfect example of community and business working together. Ilka Weissbrod, Director of The Golden Company says bees on the roof will be looked after by their ‘Bee Guardians’ together with members of LSE staff and everyone was looking forward to seeing the bees settle in their new home. Sounds like fun!

© Gaurav Sharma 2011. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore / National Geographic. Photo 2: Bees atop the London Stock Exchange © LSE Press Office, September 2011.